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Even experienced benefits pros can struggle to keep on top of the feds’ crazy 401(k) reporting requirements and special-case distribution rules.

Here’s how to handle four areas where people often get tripped up:

1. Year-end 401(k) enrollment

Suppose you hired an employee in late December and he enrolled immediately in the 401(k) plan.  His first contribution to the plan likely came out of a January check.

So should you count him in your 2008 plan report or wait until you file your 2009 report?

Answer: The feds say to wait until 2009 for record-keeping purposes, because he had no 2008 compensation from which he could make a salary deferral.

2. Distribution without consent

Generally speaking, you must contact a former employee for verification before making any 401(k) distribution over $5,000. But there are exceptions:

• distributions of under $5,000 made after age 65 (although best practice is to notify the retiree anyway), and
• situations where you’re unable to get current contact information for the person after at least four unsuccessful contact attempts.

In the latter case, keep in mind that your firm has limited choices for distributing the money. One legal option: transfer the money to a state unclaimed-property fund.

3. Contributions not withheld

What if an employee signs up for the 401(k) but, due to a clerical error, the money was never deducted from the person’s paycheck?

Here’s how to straighten it out: The IRS requires your firm to make the missing contribution on behalf of the employee, plus any related matching contributions.

Finally, you must also make up for any lost earnings on the money the employee intended to invest.  Bottom line: This is a very expensive mistake to fix, but once its done, your firm is back in ERISA’s good graces.

4. Small refunds

Suppose Payroll accidentally took out a little too much money. Example: The department took out an extra $10 per check for three checks before someone caught the mistake.

Are you required to issue a $30 refund to the employee? Yes.

Tags: 401(k)

This entry was posted on Friday, February 13th, 2009 at 6:20 pm and is filed under HR Benefits. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.