National 401(k) Day: Navigating Errors in Audit Findings

September 5, 2025, marks National 401(k) Day and the near end of another audit season for Form 5500 filings. Each year, trends emerge revealing common issues and areas that warrant close attention from plan sponsors. The following blog explores common errors in audit findings and how to successfully navigate these moving forward.

1. Auto Enrollment

Annual employee benefit plan audits often reveal that eligible employees are not automatically enrolled in their plans, particularly those who are rehired or acquired. The Internal Revenue Service (IRS) incentivizes plan sponsors to promptly identify and correct these auto-enrollment issues.

However, even when a plan sponsor makes a correction, they are often unaware of the requirement to provide the affected participant with notice, as outlined in Rev Proc 2021-30,  or what to do if an employee has already been terminated.

While plan sponsors often rely on their service providers to guide them through corrections, they can also take proactive steps to familiarize themselves with the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) and its Self-Correction Program (“SCP”).

Implementing a specific review of rehired or acquired employees, in addition to an eligibility review for each pay period, can help prevent auto-enrollment errors.

2. Untimely Contributions

Despite increased scrutiny over contribution timing, plan sponsors still struggle to balance a consistent cadence of contribution submissions. When untimely contributions occur, plan sponsors are faced with time-consuming and tedious processes to calculate lost earnings and deposit them into affected participants’ accounts.

Ideally, a client has already identified and corrected their untimely contributions and filed Form 5330 to pay the relevant excise taxes when the audit takes place. It is crucial for sponsors to understand what constitutes an untimely contribution and the steps to correct it. Typically, these issues are identified only during the audit. Once reported on Form 5500, late deposits must be corrected before they can be removed from the Delinquent Participant Contribution schedule.

3. Partial Plan Terminations

Partial plan terminations are rare, making it less likely for plan sponsors to identify these situations. A partial plan termination may not be identified until the auditor reviews the Form 5500 draft and notices a significant decrease in the number of participants. I have worked with clients facing these scenarios, and depending on the volume of forfeitures, corrections can be costly, especially for sponsors already navigating workforce reductions. Multi-year reductions add an additional layer of challenges as measurement of partial plan terminations may span multiple years

Consultants should stay informed about the plan sponsor’s workforce throughout the year. Recordkeepers can help by incorporating notifications into the systems to alert users to spikes in terminations. Finally, auditors should always review participant counts reported on Form 5500 to identify potential partial plan terminations.

4. Definition of Compensation

Definition of compensation is one of the most common audit issues. Problems often stem from new pay codes or irregular pay types, such as bonuses, commissions or auto allowances. Misunderstanding or misinterpreting the plan’s definition of eligible compensation can lead to costly and time-consuming corrections. Communication between human resources and payroll departments is essential to ensure the plan document and systems are aligned.

5. Payroll System Conversions

During this audit season, payroll system conversions continuously created environments susceptible to errors, including catch-up contribution problems, integrating recordkeeper feedback files with deferral changes, and generating census data with the correct wages for compliance testing. In most cases, these issues could have been avoided through a more extensive testing environment or coordinated efforts between the client and recordkeeper to reconcile payroll and census data before the audit.

Final Thoughts

Employee benefit plans involve ongoing compliance responsibilities, and occasional errors are inevitable. However, by learning from common mistakes and staying informed on best practices, plan sponsors develop more effective monitoring strategies. A strong team of experts and advisors can also help. Contact us today for assistance in navigating corrective actions when missteps occur.