A contribution error is a type of operational failure that occurs when employee deferrals or employer contributions to your plan are not made in the correct amounts or at the correct times. Errors may also occur if contributions are attributed to participants in ways that do not comply with the Basic Plan Document or other applicable laws and regulations.
Such errors can result in negative tax consequences for both the company and potentially plan participants.
The most common errors occur from data issues in either payroll or your Guideline platform due to incorrect birth dates, dates of hire, dates of termination, compensation, ownership percentages, family relationships, or other details. Such errors impact our ability to determine the employees who are eligible to participate or receive a distribution or loan, and our ability to process any applicable nondiscrimination tests for your plan each year.
Other errors can relate to deferral amounts contributed that do not align with a participant’s deferral election (taken from the participant’s dashboard) or the company's failure to take the steps necessary to avoid a late deposit of employee deferrals or loan payments.
How are contribution errors corrected?
Contribution errors can be fixed through the IRS’ Employee Plans Compliance Resolution System (EPCRS). Under EPCRS, a vast majority of errors may be self-corrected without notifying the IRS, obtaining its approval, or requiring your company to pay any fee or sanction.
The first step in correcting operational errors is to identify the root cause of the error to ensure that the same error does not continue to occur for future payrolls.
Useful techniques for identifying contribution errors include:
Identify if a participant was over or underpaid
Check payroll deductions in your payroll provider against a participant’s deferral rate in Guideline to ensure the proper deductions were withheld and correctly allocated to the intended contribution type (pre-tax versus Roth)
Identify if a participant was eligible to participate and if their withholdings were entered into payroll
Confirm that participant loan repayments were entered in payroll
Ensure that re-hired participants were re-entered into the plan according to the Plan Document
What information is needed to fix contribution errors?
Guideline needs accurate payroll reporting to ensure participants’ 401(k) accounts are funded appropriately. If a contribution error occurs, you should request a corrective payroll report from your payroll provider, submit the report to Guideline via the Shared Files folder on your Guideline administrator dashboard, and follow up with our Sponsor Support team so we can process such adjustments. To avoid creating additional errors that will need to be corrected or only partially correcting errors, please do not adjust future payroll files to “make up” for any prior issues.
Payroll reports should include per-pay-period data and the following:
Participant names
Pay date(s)
Gross pay for each participant for each pay date
Deductions (if applicable)
What are some other items related to correcting contribution errors?
Contribution errors can result in the plan experiencing lost earnings on late deposits or require a return of funds to the plan, as described below, although these may also occur with other operational errors.
Lost earnings
Under Department of Labor rules, employee contributions to a 401(k) plan must be deposited into plan accounts as soon as they can reasonably be segregated from the assets of the business sponsoring the plan. For small plans (those with fewer than 100 participants), this requirement is met if deposits are made within 7 business days.
For larger plans, you generally look at how quickly deposits have been made in the past. If deferrals have routinely been deposited within 3 business days, then that would be considered the deadline. Where corrections occur, potential earnings on contributions that should have been timely made to accounts may need to be calculated and paid to the plan.
Reversal of funds
Depending on whether a mistake of fact occurred, funds may need to be moved to an unallocated cash account within the plan (plan cash) or, in rare cases, sent back to the company bank account on file once a correction has been processed.
Sending back an amount that was not due to a mistake of fact would result in a 50% excise tax on the amount returned and creates the possibility of jeopardizing a plan’s tax-advantaged status.
When funds are moved to the plan cash account, which sits within your Guideline plan, such funds will be used to offset your next plan contribution. This means that you may see a partial ACH or no ACH from the company bank account on an upcoming payroll, depending on the total contributions being processed and the amount available in the plan cash account.
Support for corrections
If you have identified that your plan may need a contribution correction, please reach out to the Sponsor Support team for further assistance. For security verification, please include your Guideline account ID when reaching out. Your Guideline account ID is located in the dropdown menu on the top right corner of your administrator dashboard.