It’s hard to consider yourself a competitive employer these days if you don’t offer employee benefits. Retirement saving accounts are among the more popular benefits (aside from employer-sponsored health insurance plans). Did you know that 401(k) plans have regulations they need to be in compliance with?

Pass Non-Discrimination Testing

Discrimination is generally considered a no-go for businesses. It may sound a little strange to think of a 401(k) plan being discriminatory, but plans can discriminate against lower-income workers in favor of more highly compensated employees or even business owners. 

The actual deferral percentage, actual contribution percentage, and top-heavy tests are annual tests conducted to determine if your plan abides by non-discrimination regulations. The top-heavy test is a common cause of failure, especially for small businesses.

Follow Contribution Limits

Do you know what the limits are in 2023 for 401(k) plan contributions? This year, the limit is $22,500 for individuals. Workers over the age of 50 can contribute an additional $7,500. The limit for employee and employer contributions combined is $66,000. Keep track of contributions. 

Overcontributing can result in being penalized and taxed multiple times on the amount over the contribution limit. Employees should talk to their employer as soon as they are aware of an overcontribution. Ideally, the problem will be identified before tax day. The excess contribution and any earnings made on it should be withdrawn as soon as possible to avoid penalties and additional taxes.

File Forms on Time

No government agency is keen on dealing with late paperwork, especially the IRS. Employers offering 401(k) plans must keep track of important filing dates for forms like Form 5500. This form satisfied 401(k) reporting requirements under ERISA and Internal Revenue Code. It’s due the last day of the 7th month after the plan year ends, so there isn’t a specific date that you need to file by, unlike with tax returns and quarterly tax payments. If the date sneaks up on you and you need more time to file, file Form 5558 for a 2 ½ month extension. That can help you avoid being fined by both the IRS and DOL. 

As the employer, it is your responsibility to ensure that the 401(k) plan you offer your employees remains compliant. This is true even if you use a third-party provider. Do your due diligence and ensure that the plan you offer is compliant to avoid any fines or penalties levied against you by the IRS.

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