Managing a 401(k) plan involves several annual compliance tasks with different deadlines and dependencies. This article walks through the key responsibilities for plan sponsors, from updating company information to filing required tax forms. Expand the sections below to learn more.
As a plan sponsor, you need to keep your 401(k) plan in compliance with all Internal Revenue Service (IRS) and Department of Labor (DOL) regulations. Failing to meet these requirements may result in penalties and loss of tax benefits for the plan.
We're here to help you manage these responsibilities each year. You can see a view of completed and upcoming tasks under Compliance in your 401(k) administrator dashboard. Each task has its own deadline, and some tasks need to be finished before others can begin. For example, the company information task may need to be completed before nondiscrimination testing tasks can start.
Expand the sections below for a breakdown of the key tasks required to manage your 401(k) plan each year.
Every year, a task titled Review and update your company information will appear on your administrator dashboard. This information is requested annually because compliance testing, compensation collection, and profit-sharing contribution options can all be affected by these details.
To complete the task, you'll need to provide information about your entity (business) type, owners, certain family members of owners, and company officers.
You can complete this task at any time before other compliance tests begin. Gusto Retirement will not prevent other tasks from being finished if this task is not done, and we will assume no changes are applicable. However, it's best to review and provide updated information as early as possible. Certain company details may affect your compensation, profit sharing, and compliance testing.
Gusto Retirement cannot complete compliance testing for non-safe harbor plans or enable optional profit-sharing or employer contribution adjustments without full and accurate compensation data. Employee compensation is also needed to confirm participants have stayed within certain contribution limits.
If you use Gusto or a Gusto Embedded payroll provider (HiBob or HR for Health), we can typically collect this information directly. However, you may need to provide compensation data manually in any of the following situations.
You are a self-employed owner with self-employment income. Provide your annual compensation as soon as it has been determined and reported on Schedule C.
You are a partner and your company is taxed as a partnership. Provide the compensation reported on your K-1. (Not applicable to Schedule S-corporations.)
You use a payroll provider other than Gusto and have a self-service plan.
You use Gusto Payroll or a Gusto Embedded payroll provider, but there was an issue with compensation data for some employees.
You changed payroll providers during the prior year.
While you have until approximately the end of the year to complete this task, we recommend providing this information as early as possible.
Important: Compensation provided through this task must not be estimated. Partial or estimated compensation leads to inaccurate testing and incorrect matches, safe harbor nonelective contributions, or profit-sharing allocations. If compensation data is not available by the testing deadlines, excise taxes could apply.
Like most processes at Gusto Retirement, we cannot calculate specific employer contributions without accurate compensation data. Most contributions are based on a percentage of compensation, and all calculations need to account for compensation to make sure the annual additions limit is not exceeded.
Employer contributions are generally tax-deductible and may result in a tax credit for certain plans. To deduct or receive a credit for the expense, you need to contribute to the plan before the business' tax filing due date (plus extensions). The Gusto Retirement plan document also requires employer contributions to be made before the tax filing due date (plus extensions).
Your plan may require additional contributions for the previous year to make sure participants (including owners) get the full amount of employer matching or nonelective contributions they're entitled to. If your plan requires end-of-year adjustments, you can expect communications and next steps from Gusto Retirement.
In some cases, you may get requests for additional information.
Profit sharing is an optional contribution that employers may choose to give participants after the end of the plan year. Participants can get a profit-sharing contribution as long as they are eligible to participate in the plan, even if they do not personally contribute.
If your plan is eligible for this type of contribution, you will typically be able to complete a task through your dashboard. To make sure your profit-sharing allocation is accurate and compliant, complete any company information and compensation tasks before allocating a profit-sharing contribution.
Profit-sharing contributions are a tax-deductible business expense. To make sure contributions are allocated to participants in time, complete the profit-sharing task at least two weeks before your intended tax filing deadline. If your plan is non-safe harbor, these additional contributions will be factored into required annual testing (they count toward top-heavy minimum contributions if applicable).
There are several limit tests that apply to 401(k) plans.
The IRS limits the amount of employee contributions (deferrals) that can be made in a calendar year. If any participant exceeds these limits within a single plan or legally related group (LRG), Gusto Retirement typically handles the correction directly with those participants by Apr. 15 of the year following the plan year in which the excess occurred.
If participants made 401(k) contributions to plans not recordkept by Gusto Retirement, they need to report them to us no later than Mar. 1. If the excess is due to contributions to more than one unrelated plan and Gusto Retirement is not informed of the external contribution on time, we cannot distribute the excess after Apr. 15 under IRS rules. If the excess is within one plan or within plans of an LRG, Gusto Retirement must distribute the excess once detected, even if after Apr. 15.
Sponsors within an LRG at Gusto Retirement can help by making sure participants in more than one LRG entity have their accounts linked and that final year-end payrolls are processed on time.
Gusto Retirement or your payroll provider will typically monitor employer limits throughout the year and try to stop excess contributions from being made. However, due to the nature of payroll, this process may not always be perfect. Here are a few scenarios where limits can be exceeded and require correction after year-end:
Unexpected or unusual paychecks — A large bonus, commission, or other paycheck that exceeds normal amounts as a participant approaches a limit could push them over the applicable limit. Most commonly, the compensation limit could be exceeded due to unexpected paychecks.
Low self-employment compensation — Self-employed owners can contribute to their 401(k) through owner's draws. If the business has lower-than-expected earnings, these contributions may exceed the annual additions limit, because contributions cannot exceed actual compensation earned.
Other errors — Less commonly, other errors may result in exceeding the compensation limit or annual additions limit. For example, payroll adjustments may not always be picked up in time.
All contribution limits should be corrected as soon as administratively feasible after the end of the plan year. In general, there are no direct tax consequences to exceeding the compensation limit or annual additions limit. However, the IRS expects these limits to be closely monitored. Excesses should be rare — if there is a pattern of not correcting limits on time, the plan could be at risk for disqualification.
Compliance testing is required by the IRS after year-end to make sure a company's 401(k) plan does not unfairly favor owners and highly compensated employees (HCEs).
ADP and ACP tests cover deferrals and matching contributions respectively, while top-heavy testing looks at overall account balances. Safe harbor plans are exempt from ADP and ACP testing and are often not required to contribute top-heavy minimums.
If your plan falls outside permissible ADP or ACP limits, Gusto Retirement will provide correction options and next steps in the first quarter of the following year (as long as you provide compensation data in a timely manner, if applicable).
Correcting ADP/ACP testing failures:
Distributing refunds — Refunds distributed after Mar. 15 (for ACA plans) or Jun. 30 (for EACA/QACA plans) incur a 10% excise tax payable by the plan sponsor.
Contributing QNECs — To be deductible from employer taxes, qualified nonelective contribution (QNEC) contributions should be made before the tax-filing deadline.
A top-heavy plan must contribute top-heavy minimum contributions (THMCs) to certain non-key employees. While top-heavy status does not depend on compensation, THMCs do (up to 3% of compensation), so this cannot be processed without accurate compensation data.
Note: Safe harbor plans that do not make other employer contributions beyond the safe harbor contribution are not required to contribute top-heavy minimum contributions.
Sponsors should contribute THMCs before their tax filing deadline so the contributions can be deducted from employer taxes.
As a plan sponsor, you may need to file several IRS and DOL forms each year, like Form 5500, Form 5558, Form 8955-SSA, and Form 5330.
Employers that sponsor a retirement plan governed by the Employee Retirement Income Security Act (ERISA) need to file Form 5500 annually with the DOL. Gusto Retirement includes preparation and electronic filing of this form at no added cost. However, if your plan has more than 100 participants, you will typically be responsible for arranging and paying for a plan audit through an independent public accounting firm.
What you need to do:
Form 5500 for large plans: If you require a 5500 audit, submit the firm's information through the task on your Gusto Retirement dashboard. You are responsible for working with your auditor to provide any requested information throughout the audit process.
All 5500 forms: If Gusto Retirement is your plan's 3(16) fiduciary, you will get a notification once your Form 5500 has been filed. If Gusto Retirement is not your plan's 3(16) fiduciary, you will get a signature task once your form has been prepared. You need to review and sign before we can file.
When to complete this task: The Form 5500 filing is due on the last day of the seventh month after the end of the plan year (typically Jul. 31). For any plans without 5500s filed by this date, including plans requiring an audit, Gusto Retirement will automatically file extensions for the Oct. 15 extended deadline. Complete any compliance tasks as soon as you have accurate information to avoid delaying your 5500 filing.
Gusto Retirement automatically files this form to request a Form 5500 filing extension when needed. You do not need to request this, and there is no penalty for filing an extension.
Form 8955-SSA reports participants who no longer work for your company but still have a vested account balance in your plan. Once those participants move money out of their accounts, Form 8955-SSA will be filed again to report those distributions.
You may get a task to provide information for participants if we do not have accurate personal information, like social security numbers. Complete the task as soon as possible. The deadline for this form is Jul. 31, with an extended deadline of Oct. 15.
Form 5330 is a tax form used to report excise tax for numerous situations. Gusto Retirement uses it to report prohibited transactions and ADP/ACP test refunds done after the applicable deadline.
For late deposits: The excise tax is 15% of the lost earnings applicable to late remitted employee deferrals and loan payment corrections in the plan year being reported. Gusto Retirement will prepare this form, notify you, and publish it to your Resource Library with filing instructions. You are responsible for signing and submitting the form to the IRS along with payment. The deadline is Jul. 31 (seven months following the close of the plan year in which it applied).
For ADP/ACP test refunds done after the applicable deadline: The excise tax is 10% of the applicable correction refund plus any associated earnings. Gusto Retirement will prepare this form, notify you, and publish it to your Resource Library with filing instructions. You are responsible for signing and submitting the form to the IRS along with payment. The deadline is 15 months following the close of the plan year in which the test failed.