Did you know that the IRS occasionally conducts audits of employee benefit plans such as the 401 (k)? Employers who have these plans are expected to comply with many federal laws and regulations that may change from year to year. If the employer does not stay in compliance, it may have a negative impact on the employee relying on the 401 (k) to be legitimate.


Employers Should Ask These Questions:

  • Are employee contributions limited to the amounts allowed under tax law for the year?
  • Have you identified all employees eligible for your 401 (k) plan and have you given them the chance to make deferral elections?
  • Does the plan pass nondiscrimination tests?


If during an audit the IRS discovers compliance errors, the plan sponsor will have a chance to fix them without the plan being disqualified. If the plan is lost, a few things may happen. First it will lose its tax-exempt status. That will cause each member to be taxed on the value of their vested benefits as of the official disqualification date. This means huge tax liabilities that the participants likely did not expect. It should also be noted that withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts like IRAs.


Earnings even after the disqualification date are not tax-free, and must be included in the taxable incomes. Even the employer’s tax deductions are at risk. Compliance can be simplified and made easier with the advice from an expert tax adviser. Non-compliance can harm the financial security of plan participants and also harm the financial integrity of the business itself.


If there is any error in your 401 (k) it can be voluntarily corrected. Keeping in compliance is a part of what we do, and we can help guide you through the process each year. To protect your employees and your business contact our experienced financial planners today for more information about your 401 (k) plan.


Avoid serious tax problems caused by unexpected retirement plan disqualification by staying aware of annual changes. To learn more, contact a Boulay advisor at 952-893-9320 or learnmore@BoulayGroup.com.


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