Navigating Compliance Challenges in Employee Benefit Plans: Practical Insights and Case Studies
By Anne Tyler Hall
Managing Partner, Hall Benefits Law
Employee benefit plans face increasingly complex regulatory scrutiny from the Department of Labor (DOL) and Internal Revenue Service (IRS). As an ERISA compliance firm comprised of attorneys who have extensive experience guiding plan sponsors through audits, corrections, and transactions, Hall Benefits Law (HBL) regularly observes how seemingly routine compliance issues can escalate into significant liabilities. This white paper highlights key areas of focus drawn from recent client engagements: late participant contributions, small-dollar corrections for terminated participants, fiduciary responsibilities for missing participants and outstanding checks, forfeiture-related litigation risks, and the limitations of retroactive plan amendments. It also addresses benefit plan considerations in M&A transactions. The author includes practical strategies and real-world cases to help plan sponsors, auditors, and advisors mitigate risks proactively.
Correcting Late Participant Contributions: Strategies for Timely Remediation and Prevention of Regulatory Scrutiny
Late participant contributions remain one of the most common compliance issues and frequently serve as a gateway to broader DOL or IRS audits. In HBL’s experience, when these issues appear in an auditor’s report or on Form 5500, they often trigger expanded examinations. Plan sponsors should prioritize correction to avoid this outcome.
Under SECURE 2.0, the DOL introduced a self-correction program for modest late contributions. This provides welcome relief for smaller corrections where lost earnings are under $1,000 and corrections occur within 180 days. HBL typically recommends that eligible plan sponsors use this program to obtain formal DOL acknowledgment of proper correction. Doing so demonstrates good faith and helps prevent recurrence through strengthened processes and procedures.
If a correction does not qualify for the self-correction program—such as when lost earnings exceed $1,000 or the 180-day window has passed—it requires the full Voluntary Fiduciary Correction Program (VFCP). This involves a formal submission detailing the issue, remediation steps, and preventive measures. In one recent multi-year late contribution matter, the DOL’s closing letter explicitly noted that it would communicate the issue to the IRS, underscoring the need for coordinated correction.
Plan sponsors should not overlook even modest excise taxes. Plan sponsors must file Form 5330 with the IRS and pay the applicable excise tax (typically 15% on lost earnings) to achieve full correction and protection. In a recent audit HBL closed, the client had addressed lost earnings through VFCP; the modest excise tax amount (around $50 in some instances) was paid because it secured important safeguards. Self-correction outside the online portal remains available in appropriate cases, but the Form 5330 filing is still advisable for complete protection.
The DOL’s guidance on remittance timing—technically the 15th day of the following month for most plans yet often judged against the shortest period in which an employer remits 401(k) contributions (often, two days) best-practice standard—creates ongoing challenges. Plan sponsors should implement automated processes and regular reviews to minimize recurrence. Documentation of both the correction and preventive steps is essential.
Overseeing Small-Dollar Corrections for Terminated Participants: Balancing Practicality and Good Faith
Corrections for underpayments or overpayments to participants who have already separated from the plan require careful judgment. The IRS provides de minimis thresholds, but plan sponsors should adopt a conservative, good-faith approach, especially for rank-and-file employees.
For underpayments (the more common scenario in correction contexts), the threshold is usually $75 or less. HBL typically advises clients to make the contribution even when amounts are modest—$50, $75, or slightly higher, particularly for non-highly compensated employees. This demonstrates a strong fiduciary effort and reduces exposure in the case of a future audit. Overpayments allow slightly more flexibility, with the IRS de minimis often cited at $250 or less; here, pursuing recovery from former employees may not be practical or cost-effective, and sponsors may choose generosity.
In practice, corrections involving only a few dollars or cents per participant should be evaluated for reasonableness. Recordkeepers may charge fees that exceed the correction amount, but sponsors should document their efforts thoroughly and, where appropriate, consider reallocating small residual amounts to current participants rather than leaving funds with the employer. The goal is to restore the plan while showing diligent compliance.
Fiduciary Responsibilities Regarding Missing Participants and Outstanding Checks
Locating missing participants and managing outstanding checks has become a significant DOL audit focus and compliance hot topic. Field Assistance Bulletin (FAB) guidance outlines the fiduciary duties involved, and recent EBSA updates emphasize extensive search efforts while expanding permissible methods such as online searches.
In one terminating plan engagement involving approximately $100 million in assets, HBL identified approximately one hundred missing participants. A portion of this same group had erroneous or inconsistent Social Security numbers and TIN data. The plan sponsor and the Firm spent three to four months methodically following FAB guidance: searching internal beneficiary records and databases, utilizing online tools (including, in one memorable case, locating a participant via Facebook), and sending multiple rounds of certified mail. Every step was documented in detail.
If participants cannot be located despite diligent efforts, fiduciaries must pursue appropriate next steps: rolling balances into IRAs, setting funds aside, or escheating insignificant amounts to the state. In one terminating plan, our team successfully utilized the PBGC missing participant program to shift liability and obtain additional protection for our plan sponsor client.
Documentation is critical. Every search effort, communication, and decision must be memorialized so that, if audited, the fiduciary can demonstrate reasonable and extensive steps. Returning funds to the employer or plan should be avoided except in the rarest of circumstances. These obligations apply beyond terminating plans and warrant ongoing attention, especially in larger plans, where missing participant balances can total millions.
Mitigating Risks from Forfeiture Litigation: Recommended Plan Document Strategies
Forfeiture litigation has emerged as a surprising but persistent area of exposure. Although a number of suits have been unsuccessful, plaintiffs’ attorneys continue filing them at a high volume—sometimes multiple per week—targeting plan sponsors.
The most effective protection strategy is proactive plan document amendment. Sponsors should eliminate discretionary language regarding the use of forfeitures. A clear ordering rule is advisable: for example, first applying forfeitures to offset plan administrative expenses, with subsequent uses (such as reducing employer contributions or matching contributions) explicitly defined and non-discretionary.
In some cases, removing the ability to offset employer contributions entirely may be the prudent choice to minimize litigation risk. Auditors play a vital role by confirming that actual forfeiture usage strictly comports with the plan document.
Fiduciary breach claims are costly regardless of outcome. The minimum expense to reach a motion to dismiss is often estimated at $750,000, and most matters settle. In 2025, the top ten fiduciary breach settlements across retirement plans exceeded half a billion dollars. These risks are expanding into group health plans as well. Clear, non-discretionary plan language and strict adherence to the document are essential risk-mitigation tools.
The Challenges of Retroactive Plan Amendments: Lessons from Voluntary Correction Program Experiences
Plan sponsors sometimes propose retroactive amendments to align plan documents with historical operation (for example, to exclude certain compensation elements like bonuses). HBL’s experience is that the IRS applies significant scrutiny to such requests, particularly when they could be viewed as cutting back participant benefits.
In one Voluntary Correction Program (VCP) submission, the client sought a retroactive amendment to exclude bonuses from the definition of compensation. The plan had always operated this way, but the document did not reflect it. The IRS demanded extensive contemporaneous documentation proving this was the original intent (a classic “Scrivener’s error” argument) and was not satisfied with the available evidence. HBL negotiated a more modest correction that included a true-up contribution for rank-and-file participants (but not for highly compensated employees). The IRS accepted this approach because it benefited lower-paid participants.
In general, the IRS is far more lenient with retroactive amendments that are beneficial to participants or required by changes in the law. Amendments that derogate from the plan document or reduce benefits for prior years face substantial hurdles. Technical rules favor corrections over retroactive changes for closed plan years. Sponsors should carefully weigh documentation availability and potential IRS pushbacks before pursuing this route. A pragmatic, good-faith correction strategy—covering three to six years or from the inception of the known issue—is frequently the more reliable path.
Employee Benefit Plan Considerations in M&A Transactions: Diligence and Post-Acquisition Risks
M&A activity introduces unique compliance considerations. Benefit plan diligence should be thorough both pre- and post-closing, particularly in stock purchases where target plans become the buyer’s responsibility.
In one stock purchase transaction, the buyer’s team engaged our firm after closing. The target’s profit-sharing plan (approximately $30 million) contained multiple compliance issues, including misuse of forfeitures, partial plan termination concerns, and ineligible employees. Upon merger into the buyer’s much larger $800 million 401(k) plan, these issues carried over, creating significant exposure for the entire program.
In another post-acquisition matter, the DOL initiated an audit of the target company’s plan. The buyer faced potential penalties exceeding $300 million due to the plan’s size (approximately 20,000 employees). We resolved the matter over a two-year period, with a significantly reduced payment of about $10,000 on a single, minor issue. The experience highlighted the value of early, aggressive defense.
When feasible, terminating a target plan prior to or in connection with a transaction—allowing employees to become new participants in the buyer’s plan—can avoid inheritance of legacy compliance problems. In any M&A context, plan sponsors should evaluate correction strategies more assertively to maximize purchase price protection or minimize post-closing liabilities. Early involvement of ERISA counsel alongside auditors can prevent costly surprises.
Conclusion
Compliance for employee benefit plans demands vigilance, clear documentation, and thoughtful, proactive plan design. Whether addressing late contributions, missing participants, forfeitures, or amendments, the common threads are thorough recordkeeping, good-faith efforts, and alignment with plan documents. In M&A scenarios, these issues take on heightened importance. Plan sponsors who engage experts early, maintain robust processes, and document their actions diligently best position themselves to navigate regulatory scrutiny and litigation risks successfully.
Plan sponsors and their advisors should not hesitate to reach out for tailored guidance. A proactive step today can prevent significant liabilities tomorrow.
Anne Tyler Hall is the Managing Partner of Hall Benefits Law, a boutique ERISA and employee benefits law firm with offices in Atlanta, Los Angeles, New York, Philadelphia, Cleveland, Sacramento, and San Francisco. The Firm regularly represents plan sponsors in DOL and IRS audits, correction programs, and M&A transactions.
