Categories:
Payroll administration may not be the most visible aspect of managing a 401(k) plan, but it is among the most important. Every pay period, employers must accurately calculate employee deferrals, apply matching contributions, process loan repayments and transmit funds to the plan's recordkeeper. Even minor mistakes can create significant compliance problems if they go undetected.
Payroll errors can also be costly. Correcting them may require additional employer contributions, lost earnings, amended filings and considerable administrative time. In some cases, unresolved errors can jeopardize a plan's tax-qualified status.
Fortunately, many mistakes can be corrected through established IRS and Department of Labor (DOL) programs. The key is understanding where errors commonly occur, identifying them promptly and establishing procedures to prevent them from happening again.
Incorrect Employee Deferral Amounts
One common payroll mistake occurs when an employee's 401(k) contribution election isn't implemented correctly. For example, an employee may elect to contribute 8% of pay, but payroll continues withholding only 5%. Similar problems arise when contribution changes aren't processed promptly or automatic enrollment and escalation provisions aren't implemented correctly. These mistakes can deprive employees of retirement savings opportunities and associated employer matching contributions.
How to fix it: Review payroll records against participant elections to identify affected employees and pay periods. Depending on the circumstances and timing, correction may require employer-funded contributions to compensate for missed deferral opportunities, plus any missed matching contributions and applicable earnings. IRS correction procedures provide different methods depending on the type of failure and how quickly it is discovered.
Using the Wrong Compensation Definition
Not all compensation is necessarily treated equally under a retirement plan. Depending on the plan document, bonuses, commissions, overtime, fringe benefits and other forms of compensation may be included or excluded when calculating contributions. For example, if a plan requires deferrals on eligible bonuses but payroll excludes those payments, employees may contribute less than intended. Conversely, including compensation that should have been excluded can result in excessive contributions.
How to fix it: Compare the plan document's compensation definitions with payroll system settings. Identify affected employees and calculate contribution differences. Corrections may involve additional employer contributions, adjusted allocations or distributions of excess amounts, depending on the error. A periodic review is especially important when compensation structures or plan provisions change.
Missing or Incorrect Employer Matching Contributions
Employer matching contributions are another frequent source of administrative errors.
Mistakes may occur when payroll applies the wrong matching formula, overlooks eligible compensation or fails to recognize an employee's eligibility date. For plans calculating matches each pay period, employees who reach contribution limits early may also miss part of their intended annual match unless the plan provides an applicable year-end true-up.
How to fix it: Recalculate employer contributions using the plan's actual matching formula and eligibility provisions. When participants received less than required, employers generally must contribute the difference, adjusted for applicable earnings. Overpayments may require different corrective treatment.
Sponsors should also verify whether their plan document requires annual matching true-ups and ensure payroll procedures accommodate them.
Late Deposits of Employee Contributions
Employee deferrals and loan repayments must be transmitted to the plan promptly. Under DOL rules, participant contributions generally must be deposited as soon as they can reasonably be separated from the employer's general assets.
Although a seven-business-day safe harbor applies to plans with fewer than 100 participants, larger plans do not have a universal seven-day deadline. Late deposits can constitute prohibited transactions under ERISA, even when the underlying payroll deductions were calculated correctly.
How to fix it: Deposit outstanding contributions promptly and calculate lost earnings. Depending on the circumstances, correction may be available through the DOL's Voluntary Fiduciary Correction Program (VFCP).
An important development took effect in March 2025, when the DOL introduced a self-correction component for certain late deposits and loan repayments. Eligible employers can use this streamlined process when lost earnings total $1,000 or less and other program requirements are satisfied.
Employee Eligibility and Loan Repayment Errors
Payroll mistakes can also occur when newly eligible employees aren't enrolled on time or when loan repayments are incorrectly withheld.
Eligibility errors may involve inaccurate hire dates, hours-of-service records or failure to recognize employees who meet participation requirements. Loan errors can result from missed deductions, incorrect repayment amounts or failures to restart payments after an authorized suspension.
How to fix it: Compare employee census data with plan eligibility provisions and reconcile outstanding loan balances and repayment schedules. Missed participation opportunities may require corrective contributions, while certain loan failures may qualify for correction under IRS or DOL procedures.
Correcting Errors Through IRS and DOL Programs
Not every payroll error requires the same remedy. The IRS Employee Plans Compliance Resolution System (EPCRS) provides several correction options, including self-correction for eligible failures and voluntary correction with IRS approval.
The DOL's VFCP addresses certain fiduciary violations, including late participant contributions and loan repayments.
The appropriate approach depends on the nature of the error, when it occurred, whether participants experienced financial losses and whether the plan satisfies applicable correction requirements. Sponsors should investigate errors promptly, determine the appropriate corrective action and document both the resolution and measures taken to prevent recurrence. Coordination with the recordkeeper, third-party administrator and ERISA counsel may be necessary.
Prevention Starts With Strong Payroll Controls
The best strategy is to identify mistakes before they become compliance problems. Plan sponsors should periodically reconcile payroll records with recordkeeper data, verify contribution elections, review eligibility information and confirm that plan provisions match payroll settings.
Clear communication between human resources, payroll, benefits personnel and service providers is essential. Establishing written procedures, assigning responsibility for reconciliations and reviewing system changes can substantially reduce operational risk.
Payroll system upgrades, acquisitions, staffing changes and plan amendments deserve particular attention because they can introduce new errors into previously reliable processes.
How a Plan Advisor Can Help
A knowledgeable retirement plan advisor can play an important role in helping sponsors strengthen plan administration and oversight. Working alongside payroll personnel, recordkeepers and third-party administrators, an advisor can help identify potential operational weaknesses, review administrative procedures and coordinate discussions about recurring problems. Advisors can also help sponsors understand available correction resources and connect them with appropriate compliance specialists when necessary.
Advisors can also assist plan committees in establishing regular administrative reviews and documenting oversight activities, while recognizing that formal correction calculations and legal determinations may require specialized expertise.
Informational Resources: Internal Revenue Service (IRS): “Plan compensation errors - How to correct when your plan definition of compensation is different from plan operations” (accessed October 19, 2026); “401(k) plan fix-it guide” (accessed October 19, 2026); Payroll Integrations: “The 5 Most Common 401(k) Plan Errors (And What They Cost)” (June 18, 2026).
Kmotion, Inc., 12336 SE Scherrer Street, Happy Valley, OR 97086; 877-306-5055; www.kmotion.com
©2026 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.
This material is intended to provide general financial education and is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.