Retirement Plan Checklist

Year-end, and the start of a new year, can be stressful for plan sponsors, administrators, and business owners regarding their retirement plan. This checklist for 401(k) plans is an essential guide to ensure compliance with regulatory requirements, optimize the plan’s performance, and address any necessary updates before the new year gets too far along.

Review Contribution Limits

The IRS sets annual contribution limits for 401(k) plans, which are subject to change. For 2025, for example, the employee contribution limit for 401(k) plans has been increased to $23,500, up from $23,000 in 2024.  Employers must ensure that contributions made by participants do not exceed the annual limit.

Employers should also check whether participants have reached the “catch-up” contribution limit for those aged 50 and older, which allows them to contribute extra funds. The “catch-up” amount for 2025 is $7,500.

Possible Corrective Distributions

If employees have exceeded contribution limits during the year, corrective actions must be taken. For example, if contributions exceeded the IRS limit, the excess contributions must be refunded to the employee by the deadline (typically April 15th of the following year) to avoid penalties and tax issues.

Verify Plan Compliance

Throughout the year, 401(k) plans must comply with various regulations set by the IRS, the Department of Labor (DOL), and the Employee Retirement Income Security Act (ERISA). At year-end, plan sponsors should ensure that the plan adheres to all applicable compliance tests, including:

• Nondiscrimination testing: These tests, such as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, ensure that the plan does not disproportionately favor highly compensated employees over non-highly compensated employees. If the plan fails any of these tests, corrective actions, such as refunds of contributions or plan design changes, must be made.
• Top-Heavy Test: If more than 60% of the plan’s assets are held by key employees (e.g., company owners or top executives), the plan is considered top-heavy. In this case, the employer may need to provide additional contributions to non-key employees to maintain compliance.
• Hardship Distribution Compliance: If your plan allows for hardship withdrawals, ensure that these are in line with IRS regulations, which specify the types of events that qualify as hardships.

Review Plan Fees and Expenses

Each year, the DOL requires that 401(k) plans disclose the fees associated with the plan. These fees can include administrative, investment, and record-keeping fees. Each year, it is important to review these fees to ensure that they are reasonable and aligned with industry standards.

Plan sponsors should conduct a fee benchmarking process to compare the costs associated with their plan to similar plans. Cornerstone is happy to run an Industry Average Report for your 401(k) which will compare your fees to the industry average as a guide to knowing if your fees are aligned.

Update Plan Documents

Another important task is ensuring that the plan’s documents are up to date. Plan sponsors should review and, if necessary, amend the plan document to reflect any changes in federal laws, IRS regulations, or the plan’s operations. Changes in the law, such as adjustments to contribution limits or requirements for automatic enrollment, may require updates to the plan’s formal documentation.

Additionally, the plan’s Summary Plan Description (SPD), which outlines the key features and rules of the 401(k) plan, should also be reviewed and, if necessary, updated to reflect any operational changes that may have occurred throughout the year. Ensure that employees have access to the latest version of the SPD.

Audit Requirements

Certain 401(k) plans are subject to annual audits, which are typically required for plans with 100 or more participants. These audits help ensure that the plan complies with ERISA and other regulatory standards. If an audit is required, plan sponsors should begin preparing early to ensure all necessary documents are in order, including participant data, contribution records, and financial statements.

Audits should be completed by the plan’s tax filing deadline (Form 5500), which is typically July 31st of the following year. However, for some employers, this might require an extension.

Prepare for Form 5500 Filing

The Form 5500 is an annual report that provides information about the plan’s financial conditions, investments, and operations. Plan sponsors must file this form with the DOL and IRS by the last day of the seventh month after the plan’s year-end (for calendar year plans, this is typically July 31). The filing requires accurate and up-to-date financial data, and failure to file the form can result in penalties. Begin preparing the necessary documents well in advance of the filing deadline to avoid last-minute stress.

Employee Education and Communication

The end of the year is a good time to engage with employees about their 401(k) plans. Many employees may not be fully aware of how to optimize their retirement savings. Providing educational resources or hosting informational meetings can help employees understand the benefits of increasing their contributions or adjusting their investment allocations.

Consider offering webinars, workshops, or one-on-one consultations with financial advisors to give employees the tools they need to make informed decisions about their retirement savings. Keeping employees engaged with their 401(k) plan can lead to higher participation rates and better outcomes for both the plan and its participants.

Set Goals for the Upcoming Year

As you complete your checklist, use this time to assess the overall performance of the 401(k) plan. Review the plan’s participation rates, average account balances, and overall plan performance. Are there any areas where you can improve plan design or communication? Setting goals for the next year will ensure that the plan continues to evolve to meet the needs of both the employer and employees.

Conclusion

Managing a 401(k) plan requires attention to detail. By following a comprehensive checklist, plan sponsors can ensure compliance with regulatory requirements, correct any issues, and set the stage for a successful next year. This includes reviewing contribution limits, addressing compliance issues, managing fees, updating plan documents, preparing for audits and filings, and keeping employees informed. By staying organized and proactive, employers can help their employees secure a better financial future through their retirement plans.