When Things Go Wrong: How to Fix a 401(k) Plan Mistake

Even the best-managed 401(k) plans experience the occasional mistake.

Maybe an employee was left out of enrollment. Maybe the wrong employer match was deposited. Or maybe payroll missed an automatic escalation.

It happens — and if you’re a plan sponsor or employer, you’re not alone.

The good news is that most 401(k) plan mistakes can be corrected, as long as they’re identified and addressed properly.

This post outlines the general process for fixing common 401(k) plan issues. Every situation is different, but this overview will help you understand what steps to take and who to involve when something doesn’t go as planned.

First Things First: Why Accuracy Matters

As a plan sponsor, you have a fiduciary responsibility to operate your plan according to both:

• Your plan documents, and
• IRS and Department of Labor (DOL) regulations.

Mistakes can lead to compliance issues, penalties, or participant frustration. However, catching and correcting them shows diligence and good faith. The key is to act promptly and document the process.

Common 401(k) Plan Mistakes

401(k) plans are complex, and errors can happen at any point in administration. Some of the most common include:

• Missed deferrals (eligible employees weren’t enrolled or their contributions didn’t start on time)
• Incorrect employer matching contributions
• Failure to apply the plan’s definition of compensation correctly
• Late deposits of employee contributions
• Errors in loan processing or repayment
• Missed required minimum distributions (RMDs) for older or terminated participants
• Plan document failures

While the issues vary, the approach to correction generally follows the same core steps.

Step 1: Identify and Document the Error

The first step is recognizing that something isn’t right. This might happen during:

• Payroll audits
• Annual plan reviews
• Third-party administrator (TPA) checks
• A participant inquiry

Once identified, document what happened in detail:

• When the error occurred
• Which employees were affected
• How long it continued
• What caused it

Clear documentation will make it easier to choose the right correction method later.

Step 2: Determine the Scope and Impact

Next, figure out who and what the error affected.

• How many employees were impacted?
• How much money was involved?
• Did it affect contributions, investments, or distributions?
• Did it continue across multiple plan years?

Quantifying the problem helps your plan provider or advisor decide whether a self-correction or formal correction filing is needed.

Step 3: Choose a Correction Method

The IRS and DOL offer official correction programs to help employers fix plan mistakes. The two most commonly used are:

1. Self-Correction Program (SCP)

Allows you to fix certain errors on your own without contacting the IRS, as long as they’re not severe and are corrected promptly.

• Typically used for minor administrative mistakes (like a missed contribution or small timing error).
• Works best when the plan has a strong history of compliance.

Reference: https://www.irs.gov/retirement-plans/correcting-plan-errors-self-correction-program-scp-general-description 

2. Voluntary Correction Program (VCP)

Used when the mistake is more serious or has gone on for a while.

• Requires submitting a formal application to the IRS.
• The IRS reviews and approves the correction method.
• The goal is to resolve the issue before it’s discovered during an audit.

In more serious cases (i.e. late deposits or unremitted employee contributions) the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) may also apply.

Reference:

IRS – https://www.irs.gov/retirement-plans/voluntary-correction-program-general-description 

DOL – https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/correction-programs 

Step 4: Make the Correction and Restore the Plan

Once the proper correction method is chosen:

• Calculate the adjustment needed (for example, missed deferrals or match true-ups).
• Contribute any lost earnings to make affected participants whole.
• Update plan records to reflect the correction.
• Review internal procedures to prevent future errors.

In many cases, your TPA or recordkeeper can help with the math and documentation.

Step 5: Document Everything

This step is critical. Keep thorough records of:

• What happened
• How it was discovered
• How the correction was calculated
• When and how it was fixed
• Who was involved in the process

This documentation demonstrates fiduciary prudence and provides a clear record if your plan is ever audited by the IRS or DOL.

Step 6: Review and Prevent Future Errors

Once the correction is made, use it as an opportunity to strengthen your internal controls.

• Schedule periodic plan audits or check-ins with your TPA or advisor.
• Review your payroll and contribution processes for accuracy.
• Train staff who handle plan data and payroll integration.

The goal isn’t just to fix the mistake; it’s to build confidence in your plan’s operations moving forward.

The Role of Your Advisor and Service Providers

You don’t have to go through the correction process alone.

A qualified 401(k) advisor, TPA, recordkeeper and/or ERISA attorney can help you:

• Identify which correction method applies
• Calculate adjustments accurately
• Communicate clearly with affected employees
• Coordinate filings or documentation

Every plan, and every mistake, is nuanced. 

The best approach depends on the type of error, its duration, and who it affected.

401(k) plan mistakes happen — even in well-run plans.

What matters most is how you respond. Acting quickly, documenting thoroughly, and following IRS and DOL correction guidance demonstrates strong fiduciary oversight.

Every situation is different, so always consult your plan’s service providers: recordkeeper, TPA, advisor, or ERISA counsel before making corrections.