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Eligible Compensation Errors in 401(k) Plans: What are They and How to Fix Them

by | Apr 29, 2026

Last year, PriceKubecka performed nearly 500 401(k) audits. We saw a lot of issues. But after late deposits, one stood out: Eligible compensation errors

They’re common. They’re confusing. And if ignored, they can get expensive. The good news? They’re fixable—and preventable.

What Is “Eligible Compensation” in a 401(k) Plan?

Most employers hear “compensation” and only think salary/wages. But your plan document may include (or exclude) much more including overtime, bonuses, commissions, and tips.

And that’s where problems start.

Key question:
If an employee elects to defer 4%, do you know exactly what that 4% applies to?

If your payroll team doesn’t know—or your system isn’t set up correctly—you likely have errors.

Man working on phone

The Most Common Issue: Getting Compensation Wrong

When plans don’t follow their own definition of eligible compensation, it leads to:

  • Understatements (missed deferrals or employer contributions)
  • Overstatements (too much contributed)

Why does this happen?

  • Misconfigured payroll codes
  • Payroll provider changes
  • Lack of internal training
  • Plan rules not aligned with payroll setup

At its core, this is a system + awareness problem.

How to Fix Missed Compensation (Exclusions)

If eligible compensation was excluded, it creates a: Missed Deferral Opportunity (MDO)

That means employees missed the chance to contribute to their retirement.

Correction typically requires:

  • QNEC (Qualified Non-Elective Contribution)
    • 25%–50% of the missed deferral
  • 100% of missed employer match
  • Lost earnings

💡 Timing matters:

  • Fix it quickly → ~25% correction
  • Delay → up to 50%

Can you self-correct?

Often, yes. If the error is operational and fixed within two years, it may qualify for IRS self-correction (SCP). For long-term or complex issues, involve an ERISA attorney.

    How to Fix Overstated Compensation (Inclusions)

    If too much compensation was included, corrections are usually simpler:

    • Retroactively amend the plan, OR
    • Return excess contributions to participants

    Which route is best?  It depends on your facts and circumstances. Always coordinate with your TPA, auditor, and ERISA counsel.

    How to Prevent Eligible Compensation Errors (Best Practices)

    This is where most plans win—or keep repeating mistakes.

    1. Simplify Your Plan Definition

    Use a clear, consistent definition of compensation across all contribution types.

    1. Align Payroll + Plan Rules

    Every payroll change should trigger one question: Does this impact eligible compensation?

    1. Control Pay Codes

    Before adding new pay codes:

    • Define how they’re treated in the plan
    • Map them correctly in payroll
    1. Perform quarterly or semi-annual payroll audits:
    • Review all wage codes
    • Check for anomalies
    • Validate calculations
    1. Train Your Team (Every Year)

    Your payroll and HR teams should clearly understand:

    • What counts as compensation
    • How deferrals are calculated
    • Where errors typically occur

    Why This Matters for Your 401(k) Audit

    Eligible compensation errors are one of the most common audit findings—and one of the most preventable. Left unchecked, they can lead to:

    • Costly corrections
    • Compliance risk
    • Frustrating, time-consuming audits

    Handled correctly, they become a non-issue.

    Work With a 401(k) Audit Specialist

    At PriceKubecka, we don’t just identify errors—we help you avoid them. Our approach:

    • Full-population testing (not sampling)
    • Smarter upfront data requests
    • Minimal back-and-forth
    • Typically <5 hours of your time

    👉 Flat-fee 401(k) audits. No surprises. No chaos.

    Need Help Fixing or Preventing Compensation Errors?

    If this showed up in your audit—or you want to make sure it doesn’t next year—we can help.

    Talk to a PriceKubecka 401(k) audit expert today.

    Frequently Asked Questions

    What is a missed deferral opportunity (MDO)?

    A missed deferral opportunity (MDO) occurs when an employee’s eligible compensation was not properly included, causing them to miss contributions to their 401(k). This is considered an operational error and typically requires corrective contributions from the employer.

    What causes eligible compensation errors in 401(k) plans?

    The most common causes include:

    • Incorrect payroll system setup
    • Misclassified or new pay codes
    • Changes in payroll providers
    • Lack of training or oversight
    • Plan definitions not aligned with payroll
    How can employers prevent 401(k) compensation errors?

    To prevent errors:

    • Use a simple, consistent compensation definition
    • Align payroll systems with plan rules
    • Review pay codes regularly
    • Conduct periodic payroll audits
    • Train HR and payroll teams annually
    Are eligible compensation errors common in 401(k) audits?

    Yes. Eligible compensation errors are one of the most frequently identified issues in 401(k) audits, second only to late deposits. They are also one of the most preventable with proper processes in place.

    What happens if eligible compensation errors are not corrected?

    Uncorrected errors can lead to:

    • IRS and DOL compliance issues
    • Financial penalties
    • Required plan corrections
    • Increased audit scrutiny
    Does a Fiscal-Year 401(k) Plan Still Need an Audit?

    Potentially, yes.

    Operating on a fiscal year does not eliminate or change the basic requirement for an independent employee benefit plan audit. Whether a defined contribution plan requires an audit generally depends on its Form 5500 filing status and the applicable participant-count rules—not whether its plan year ends December 31.

    For defined contribution plans, the relevant participant count now focuses on participants and beneficiaries who have account balances at the beginning of the plan year, rather than everyone merely eligible to participate.

    So an off-cycle plan sponsor should answer two separate questions:

    Do we have an audit requirement?

    And, if so:

    When must that audit be completed so our Form 5500 can be filed on time?

    Those are related questions, but they aren’t the same question.

    When Should a Fiscal-Year 401(k) Audit Start?

    The Form 5500 deadline should be the end of your audit timeline—not the beginning of it. The safest approach is to work backward from your actual filing deadline and establish the audit schedule well in advance.

    If an independent audit is required, the auditor’s report generally accompanies the Form 5500 filing. That means the audit needs to be substantially complete before your filing deadline arrives.

    There isn’t one audit-start date that works for every plan. The amount of time needed depends on factors such as plan size, the availability of records, the complexity of the plan and whether testing identifies issues requiring follow-up.

    A practical timeline should allow time for:

    Data collection: Your team may need to gather census information, payroll data, contribution records, recordkeeper reports, participant files and plan documents.

    Audit testing: Your auditor will perform required procedures and may select participants or transactions for additional documentation.

    Follow-up questions: Missing information and discrepancies often require responses from HR, payroll, the recordkeeper, TPA or other providers.

    Resolving exceptions: Eligibility errors, contribution discrepancies, participant loans, distributions, compensation issues and other findings can require additional investigation.

    Final review and issuance: The audit team still needs time to complete its review and issue the auditor’s report before the Form 5500 is finalized.

    Example: A 401(k) Plan With a March 31 Year-End

    Suppose your plan year ends March 31.

    Your normal Form 5500 deadline is generally October 31.

    With a timely Form 5558 extension, the deadline can generally be extended to January 15.

    That does not mean January should become your target date for beginning the audit.

    Instead, the plan sponsor and auditor should establish a timeline that leaves enough time before the applicable deadline to obtain records, complete testing and address any unexpected issues.

    In other words:

    March 31 plan year-end → October 31 normal deadline → January 15 extended deadline

    Your audit calendar should be built backward from whichever filing deadline applies.

    Example: A 401(k) Plan With a June 30 Year-End

    A June 30 plan operates on a very different schedule.

    Its Form 5500 would generally be due January 31 of the following year.

    With a timely Form 5558 extension, the deadline would generally move to April 15.

    For that employer, traditional summer 401(k) “audit season” may be largely irrelevant. Its audit preparation and testing may instead take place during the fall and winter.

    That is why a plan with a non-calendar-year end should work with an auditor that maintains employee benefit plan audit capabilities throughout the year.

    What Can Delay an Off-Cycle 401(k) Audit?

    Having a different deadline doesn’t protect a plan from the same issues that slow down calendar-year audits.

    Some common audit roadblocks include:

    • Missing or inaccurate census information
    • Eligibility and plan entry-date errors
    • Incorrect employer contribution or match calculations
    • Incorrect application of the plan’s compensation definition
    • Late participant contributions
    • Participant loan problems
    • Vesting or forfeiture discrepancies
    • Distribution documentation issues
    • Differences between payroll and recordkeeper data
    • Delays obtaining information from outside service providers

    One of the advantages of starting early is having time to resolve those issues before they become filing-deadline problems.

    What If Your Fiscal-Year Form 5500 Deadline Falls on a Weekend or Holiday?

    There is an important exception to the dates in the chart.

    If a Form 5500 filing deadline falls on a Saturday, Sunday or federal holiday, the filing can generally be made on the next day that is not a Saturday, Sunday or federal holiday. U.S. Department of Labor

    That means sponsors should verify the precise deadline for the applicable filing year rather than relying solely on a recurring calendar.

    The month-by-month chart is best used as a planning guide.

    What About Short Plan Years?

    A short plan year can occur when, for example, a plan changes its plan-year end or terminates and completes the distribution of plan assets.

    The general Form 5500 timing rule still applies: the filing is generally due by the last day of the seventh calendar month after the short plan year ends, subject to an authorized extension. U.S. Department of Labor

    Short plan years can introduce additional reporting and audit considerations, so sponsors should coordinate the filing timeline with their TPA, auditor and other advisors rather than assuming the normal annual schedule applies.

    Don’t Build Your Audit Around October 15 If October 15 Isn’t Your Deadline

    October 15 gets enormous attention in the 401(k) industry because it is the extended Form 5500 deadline for many calendar-year plans.

    But it’s only one deadline.

    For a non-calendar-year plan, your filing date could fall in January, April, June, November—or virtually any other month.

    Your audit calendar should therefore begin with three questions:

    When does our 401(k) plan year end?

    When is our Form 5500 due?

    When does the audit need to begin to comfortably meet that deadline?

    Once those dates are established, your organization can build a recurring compliance calendar around its own plan rather than someone else’s audit season.

    Looking for a 401(k) Auditor for a Fiscal-Year Plan?

    PriceKubecka performs employee benefit plan audits throughout the year for both calendar-year and non-calendar-year 401(k) plans.

    Our employee benefit plan specialists perform more than 400 EBP audits annually, including 401(k), 403(b) and ESOP audits. Because employee benefit plan auditing is a significant part of our audit practice, we can work with plan sponsors whose audit and Form 5500 deadlines fall throughout the year.

    Whether your plan ends March 31, June 30, September 30 or another date, your audit should be built around your plan year and your deadline.

    [Talk to a 401(k) Auditor]

    Example: A 401(k) Plan With a March 31 Year-End

    Suppose your plan year ends March 31. Your normal Form 5500 deadline is generally October 31.

    With a timely Form 5558 extension, the deadline can generally be extended to January 15.

    That does not mean January should become your target date for beginning the audit.

    Instead, the plan sponsor and auditor should establish a timeline that leaves enough time before the applicable deadline to obtain records, complete testing and address any unexpected issues.

    In other words:

    March 31 plan year-end → October 31 normal deadline → January 15 extended deadline

    Example: A 401(k) Plan With a June 30 Year-End

    A June 30 plan operates on a very different schedule.

    This plan’s Form 5500 would generally be due January 31 of the following year. With a timely Form 5558 extension, the deadline would generally move to April 15.

    For that employer, traditional summer 401(k) “audit season” may be largely irrelevant. Its audit prep and testing may instead take place during the fall and winter.

    That’s why a plan with a non-calendar-year end should work with an auditor that maintains EBP audit capabilities throughout the year.

    In other words:

    June 30 plan year-end → January 31 normal deadline → April 15 extended deadline

    What Can Delay an Off-Cycle 401(k) Audit?

    Having a different deadline doesn’t protect a plan from the same issues that slow down calendar-year audits. Some common audit roadblocks include:

    • Missing or inaccurate census information
    • Eligibility and plan entry-date errors
    • Incorrect employer contribution or match calculations
    • Incorrect application of the plan’s compensation definition
    • Late participant contributions
    • Participant loan problems
    • Vesting or forfeiture discrepancies
    • Distribution documentation issues
    • Differences between payroll and recordkeeper data
    • Delays obtaining information from outside service providers

    One of the advantages of starting early is having time to resolve those issues before they become filing-deadline problems.

    What If Your Fiscal-Year Form 5500 Deadline Falls on a Weekend or Holiday?

    There is an important exception to the dates in the chart. If a Form 5500 filing deadline falls on a Saturday, Sunday or federal holiday, the filing can generally be made on the next day that is not a Saturday, Sunday, or federal holiday. 

    That means sponsors should verify the precise deadline for the applicable filing year rather than relying solely on a recurring calendar. The month-by-month chart is best used as a planning guide.

    What About Short Plan Years?

    A short plan year can occur when, for example, a plan changes its plan-year end or terminates and completes the distribution of plan assets.

    In this case, the general Form 5500 timing rule still applies: the filing is generally due by the last day of the seventh calendar month after the short plan year ends, subject to an authorized extension. 

    Short plan years can introduce additional reporting and audit considerations, so sponsors should coordinate the filing timeline with their TPA, auditor, and other advisors rather than assuming the normal annual schedule applies.

    Don’t Build Your Audit Around October 15 if it isn’t Your Deadline

    October 15 gets enormous attention in the 401(k) industry because it is the extended Form 5500 deadline for many calendar-year plans. But it’s only one deadline.

    For a non-calendar-year plan, your filing date could fall in January, April, June, November—or virtually any other month. Your audit calendar should therefore begin with three questions:

    1. When does our 401(k) plan year end?
    2. When is our Form 5500 due?
    3. When does the audit need to begin to comfortably meet that deadline?

    Once those dates are established, your organization can build a recurring compliance calendar around its own plan rather than someone else’s audit season.

    Looking for a 401(k) Auditor for a Fiscal-Year Plan?

    PriceKubecka performs employee benefit plan audits throughout the year for both calendar-year and non-calendar-year 401(k) plans.

    Our EBP specialists perform more than 400 audits annually, including 401(k), 403(b) and ESOP audits. Because employee benefit plan auditing is a significant part of our audit practice, we can work with plan sponsors whose audit and Form 5500 deadlines fall throughout the year.

    Whether your plan ends March 31, June 30, September 30, or another date, your audit should be built around your plan year and your deadline.

    [Talk to a 401(k) Auditor]

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