November 17, 2025

Employer-sponsored 401(k) plans are one of the most powerful tools for attracting and retaining talent, but they also come with complex compliance responsibilities. The Internal Revenue Code and Department of Labor (DOL) regulations impose strict requirements governing contribution limits, nondiscrimination testing, and timely deposits.
Failure to meet these obligations can result in plan disqualification, tax penalties, and fiduciary exposure—all of which can create substantial financial and legal risks for employers.

Key Compliance Areas Employers Must Monitor

1. Annual Contribution Limits

Each year, the IRS sets maximum limits on both employee and employer contributions. For 2025, the limits are as follows:

• Employee deferrals: up to $23,000 (plus an additional $7,500 catch-up for employees age 50 or older).
• Total contributions (employee + employer): capped at the lesser of $70,000 (or $77,500 with catch-up) or 100% of compensation.

Employers must ensure that contributions—including elective deferrals, matching contributions, and profit-sharing allocations—do not exceed these limits. Over-contributions must be corrected promptly to avoid penalties.

2. Nondiscrimination Testing

Traditional 401(k) plans are subject to annual ADP, ACP, and Top-Heavy testing to ensure the plan does not favor highly compensated employees (HCEs).
If a plan fails testing, corrective measures—such as refunds to HCEs or qualified non-elective contributions (QNECs) to non-HCEs—must be taken within strict time frames.
Failure to correct can lead to loss of the plan’s tax-qualified status.

To avoid repeated testing failures, many employers implement Safe Harbor 401(k) plans, which automatically satisfy the ADP and ACP requirements in exchange for making mandatory, fully vested employer contributions.

3. Timely Deposit of Employee Deferrals

The Department of Labor requires that employee salary deferrals be deposited into the plan as soon as administratively feasible—generally within a few business days after payroll. Late deposits constitute prohibited transactions and require both correction and payment of excise taxes. Employers must also report the issue on Form 5500 and, in some cases, make a Voluntary Fiduciary Correction Program (VFCP) filing.

4. Annual Reporting and Disclosure Obligations

Employers are responsible for accurate and timely filing of Form 5500, distribution of participant notices, and providing Safe Harbor disclosures (if applicable).
These requirements serve not only to inform participants but also to demonstrate the plan’s ongoing compliance with federal law.

Why Compliance Protects the Employer as Well as Employees

Maintaining a compliant 401(k) plan protects employers from regulatory scrutiny and potential participant claims. The IRS and DOL have authority to audit plans, assess penalties, and mandate corrective actions for even minor oversights. More importantly, as plan fiduciaries, employers have a legal obligation to act prudently and in the best interests of plan participants. A consistent compliance strategy demonstrates good faith, minimizes risk, and supports long-term employee trust.

Best Practices for Employers

• Conduct annual plan reviews with legal and plan administrators.
• Ensure timely remittance of all employee and employer contributions.
• Use Safe Harbor provisions or automatic enrollment to improve participation and reduce testing risk.
• Document all decisions and retain detailed plan records for audit readiness.
• Engage ERISA counsel for plan amendments, corrections, and IRS or DOL filings.

Conclusion

401(k) compliance is not merely a regulatory formality - it is a fiduciary obligation and a reflection of an employer’s commitment to its workforce. By maintaining strict adherence to contribution limits, deposit timing, and nondiscrimination rules, employers safeguard both the tax benefits of the plan and the trust of their employees.