If you determine that compensation is coded wrong in your payroll system, there are two parts to fixing this mistake. First, fix the payroll system for future payrolls. Second, decide how you will fix the past.
The IRS requires you to return the plan to the position it would have been in if the mistake hadn’t occurred. However, particularly as it relates to 401(k) contributions, if too little money was transmitted to the plan as employee deferrals, the employee still received the money as part of their paycheck. So, the IRS has rules that allow you to only put in 50% of the amount of the 401(k) deferral that was missed. Of course if deferrals were wrong, then the match was probably also wrong. Again, the IRS has rules about how much should be matched.
The exact rules on how to fix this error are found in IRS Revenue Procedure 2013-12. You will want to consult with a retirement plan profession who does plan corrections for assistance in determining exactly how much is due to the plan in missed contributions. You’ll also need to make up lost earnings.
If participants received too large of a contribution, the money needs to be removed from their accounts. Again, the IRS has a defined process by which this must be done. You’ll need to work with a plan corrections expert to help you navigate this process.
It is possible that during the period before you caught the mistake that terminated participants were over or under paid. It is also possible that loans were issued for more than was allowed because the account balance was incorrectly too high. Again, the IRS has provided information on how to fix all of these errors in their Revenue Procedure. If you find you have made this mistake, you should work with a plan corrections specialist to navigate your way through the maze of correction options.
If you find the error within 2 years of first making it OR if the error is considered insignificant, you can self-correct as long as you follow one of the correction methods outlined in the Revenue Procedure. However, if you find the error after 2 years and determine it’s significant, you must file with the IRS through their Voluntary Correction Program for permission to correct the plan. There is a user fee for the IRS program that varies based on the number of people in the plan.