As a Gusto 401(k) plan sponsor or administrator, you may need to identify and fix contribution errors in your plan. This article explains what causes these errors, how to correct them through the IRS's correction program, and what to submit so we can process the fix.
A contribution error is a type of operational failure that happens when employee deferrals or employer contributions to your plan are not made in the correct amounts or at the correct times. Errors may also occur if contributions are attributed to participants in ways that do not comply with the Basic Plan Document or other applicable laws and regulations.
These errors can result in negative tax consequences for both your company and potentially plan participants.
The most common errors come from data issues in either payroll or your Gusto Retirement plan.
These include incorrect:
Birth dates
Dates of hire
Dates of termination
Compensation
Ownership percentages
Family relationships
These data issues impact our ability to determine which employees are eligible to participate, get a distribution or loan, and process any applicable nondiscrimination tests for your plan each year.
Other errors can relate to deferral amounts that do not align with a participant's deferral election (from the participant's dashboard) or the company's failure to take the steps needed to avoid a late deposit of employee deferrals or loan payments.
Contribution errors can be fixed through the Internal Revenue Service's (IRS) Employee Plans Compliance Resolution System (EPCRS). Under EPCRS, you can self-correct most errors without notifying the IRS, getting its approval, or paying any fee or sanction.
The first step in correcting operational errors is to identify the root cause of the error so the same mistake does not continue for future payrolls.
Check if a participant was overpaid or underpaid
Compare payroll deductions in your payroll dashboard against a participant's deferral rate in Gusto Retirement to confirm the proper deductions were withheld and correctly allocated to the intended contribution type (pre-tax versus Roth)
Confirm whether a participant was eligible to participate and if their withholdings were entered into payroll
Verify that participant loan repayments were entered in payroll
Confirm that re-hired participants were re-entered into the plan according to the plan document
We need accurate payroll reporting to make sure participants' 401(k) accounts are funded appropriately. If a contribution error occurs, follow these steps:
Request the applicable payroll report from Gusto or your payroll provider.
Submit the reports to Gusto Retirement through the Shared files folder on your 401(k) administrator dashboard.
Follow up with our Retirement Sponsor Support team so we can process the adjustments.
Important: Do not adjust future payroll files to "make up" for prior issues. This can create additional errors or only partially correct existing ones.
Payroll reports should include per-pay-period data with the following:
Participant names
Pay date(s)
Gross pay for each participant for each pay date
Deductions (if applicable)
The payroll reports you need to submit depend on what happened. If a payroll was run in error and then reversed, submit all of the following that apply:
Original payroll report — the report for the payroll that was run in error
Reversal report — the report showing the voided or reversed payroll
Corrective payroll report — if a corrected payroll was run after the reversal, include the report for that corrected payroll
This full set of reports gives us a complete picture of what occurred, so we can process the correction accurately.
Under Department of Labor rules, you need to deposit employee contributions to a 401(k) plan into plan accounts as soon as you can reasonably segregate them from the assets of the business sponsoring the plan.
Small plans (fewer than 100 participants) meet this requirement if deposits are made within seven business days
Larger plans are generally measured by how quickly deposits have been made in the past. If deferrals have routinely been deposited within three business days, that would be considered the deadline.
Where corrections occur, we may need to calculate and pay potential earnings on contributions that should have been made to accounts on time.
Depending on whether a mistake of fact occurred, we may need to move funds to an unallocated cash account within the plan (plan cash) or, in rare cases, send them back to the company bank account on file once we process a correction.
Important: Sending back an amount that was not due to a mistake of fact would result in a 50% excise tax on the amount returned and creates the possibility of jeopardizing a plan's tax-advantaged status.
When we move funds to the plan cash account within your Gusto Retirement plan, we use those funds to offset your next plan contribution. This means you may see a partial ACH or no ACH from the company bank account on an upcoming payroll, depending on the total contributions being processed and the amount available in the plan cash account.
If you have identified that your plan may need a contribution correction, reach out to our sponsor support team for further assistance. For security verification, include your Gusto Retirement account ID when you reach out. You can find your Gusto Retirement account ID in the dropdown menu at the top right corner of your administrator dashboard.