The start of the year is a critical time for employers sponsoring a 401(k) plan. While many businesses focus on payroll resets, benefits renewals, and year-end reporting, 401(k) compliance issues often surface quietly in January and February — and can create serious problems if left unaddressed.

Understanding the most common early-year 401(k) compliance challenges can help employers avoid costly corrections, IRS penalties, and fiduciary risk later in the year.

Why Early-Year 401(k) Compliance Matters

Many compliance issues originate months earlier but aren’t discovered until the new plan year begins. Changes in employee status, payroll systems, contribution limits, and plan documents can all trigger errors if not handled correctly.

Catching and correcting issues early often means simpler fixes and lower costs. Waiting too long can lead to missed deadlines, failed testing, or formal correction programs.

Late or Incorrect Employee Contributions

One of the most common compliance problems employers face early in the year is late or incorrect employee deferral deposits.

Employee 401(k) contributions must be deposited as soon as administratively possible after each payroll. Delays — even unintentional ones — can be considered a prohibited transaction and may require corrective contributions and reporting.

Early in the year, contribution issues often arise due to payroll system changes, new vendors, or internal staffing transitions.

Missed or Incorrect Employer Match Contributions

Employer matching contributions are another frequent trouble spot.

Errors can occur when:

  • Payroll data is incomplete or inaccurate

  • Eligibility rules are misunderstood

  • Compensation definitions are applied incorrectly

  • Employees change contribution rates late in the year

If employer contributions don’t align with the plan document, corrections may be required, including retroactive contributions and earnings adjustments.

Eligibility and Enrollment Errors

Eligibility tracking mistakes are especially common in January.

New hires who should have been enrolled may be overlooked, or employees who met eligibility requirements late in the prior year may not be enrolled on time. In plans with automatic enrollment, missed deferrals can quickly turn into larger compliance issues.

Employers should review eligibility reports early to confirm that all eligible employees were offered participation at the correct time.

Incorrect Compensation Definitions

Many compliance issues stem from using the wrong definition of compensation.

Some plans define compensation as W-2 wages, while others exclude bonuses, commissions, or overtime. Early-year payroll setup errors can cause contributions to be calculated incorrectly if compensation definitions aren’t aligned with the plan document.

This is especially important when payroll systems are updated at the beginning of the year.

Plan Document and Operational Misalignment

A common but often overlooked issue is operating the plan in a way that doesn’t match the plan document.

This can include:

  • Applying eligibility rules incorrectly

  • Using outdated match formulas

  • Failing to follow auto-enrollment or auto-escalation provisions

  • Ignoring recent plan amendments

Operating outside the plan document can create fiduciary exposure even if the intent was not malicious.

Testing and Safe Harbor Misunderstandings

Employers sometimes assume their plan is exempt from testing when it is not.

Safe Harbor plans must meet specific requirements every year, including proper notices and contribution formulas. Missing a notice or altering contributions without proper amendments can jeopardize Safe Harbor status and lead to failed nondiscrimination testing.

Early review helps ensure the plan remains compliant before testing season begins.

Required Notices and Deadlines

Several important notices and filings occur early in the year, including:

  • Safe Harbor notices

  • Participant disclosures

  • Preparation for Form 5500 reporting

Missing or delaying required notices can create compliance gaps that are difficult to correct retroactively.

How Employers Can Reduce Compliance Risk

Employers can minimize 401(k) compliance issues by conducting an early-year plan review. This includes reconciling payroll data, reviewing eligibility and contribution reports, confirming plan document alignment, and addressing any discrepancies promptly.

Working with an experienced 401(k) advisor can help employers identify risks early, implement corrections properly, and stay ahead of evolving regulatory requirements.

Bottom Line

Early-year 401(k) compliance issues are common — but they are also preventable. Employers who take the time to review their plan operations in January and February are better positioned to avoid costly corrections and maintain a compliant, well-run retirement plan throughout the year.

Proactive oversight today can protect both the employer and plan participants long before compliance issues turn into major problems. Schedule an appointment with one of our advisors, here!