Plan Design Risks, Pitfalls, and Best Practices

Designing your Plan to Stay Compliant

When designing a 401(k) plan, there are a variety of features and options that can be included to reduce the risk of IRS compliance issues. To understand your plan’s compliance vulnerabilities, you should first understand the company characteristics that can indicate increased risks.

What You Need to Know/Key Takeaways:

  • A small participant base, low owner’s wages, large wage discrepancies, and a high proportion of owners may increase compliance risks
  • Plan design pitfalls, including matching a low percentage of employee deferrals or up to a high percentage of income can contribute to compliance testing issues
  • Short plan years, and unpredictable earnings can make in-year testing and preventive measures more difficult
  • Best practices for plan design include providing employer matching, coordinating automatic enrollment and matching, and implementing a vesting schedule instead of service requirements 

Certain company characteristics may increase compliance risks. Click on each company characteristic below to learn more: 

Despite the increase of compliance risks from these characteristics, however, many compliance risks can be managed effectively through purposeful plan design:

Learn more about how to create the best plan designs for your company, but keep in mind that if your company possesses any of the characteristics listed here, and owners or highly compensated employees want to be able to contribute the maximum amount each year without worrying about compliance testing, a safe harbor plan design may be the best option for reducing risk. 


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