IRS sounds alarm on major 401(k) mistakes you must avoid | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

Most workers who contribute to a 401(k) are focused on steady, long‑term progress toward a secure retirement.

They want to build balances that can withstand market cycles, make full use of employer matching contributions, and maintain a savings rate that keeps them on track for their future income needs.

Recent data shows that many Americans are taking this responsibility seriously, with average savings rates reaching record levels, according to Fidelity Investments.

Higher contributions suggest that workers are trying to strengthen their financial position and reduce uncertainty about life after their careers.

But the other side of that coin, as I reported for TheStreet on June 6, a significant share of workers still face barriers to building meaningful retirement savings.

Many do not have access to an employer‑sponsored plan, and those who do often accumulate only limited balances. At the same time, a growing number of households must decide how to allocate each paycheck between long‑term saving and immediate financial pressures such as housing costs or student loan obligations, according to the National Institute on Retirement Security (NIRS).

“Most retirement programs today rely on workers saving voluntarily, with the tension between saving and the cost of buying a home, daycare, and college creating enormous challenges for the middle class,” said Dan Doonan, NIRS executive director.

Importantly, the Internal Revenue Service (IRS) has cautioned that strong savings habits alone are not enough. The agency continues to identify common 401(k) errors that can undermine even the most diligent efforts.

Some mistakes involve employers failing to follow plan rules, while others stem from workers overlooking important administrative steps. These issues can affect contributions, tax treatment, and long‑term growth.

IRS identifies major 401(k) mistakes, how to avoid them

The IRS warns that many plans fall out of compliance because employers fail to keep their documents current. The agency notes that some plans have not been updated within the past few years to reflect recent law changes and often recommends annual reviews of specific items.

To avoid this, “Use a calendar that notes when you must complete amendments,” the IRS advises. “Review your plan document annually. Maintain regular contact with the company that sold you the plan.”

Another frequent issue arises when a plan is not operated according to its own terms.

The IRS calls this a very common mistake and stresses the importance of ensuring that everyone involved understands and follows the written rules.

“Develop a communication mechanism to make all relevant parties aware of changes on a timely and accurate basis (best practices),” the IRS wrote. “Perform a review at least annually to ensure that you’re following plan terms.”

Errors also occur when employers misapply the plan’s definition of compensation. The IRS recommends annual reviews to confirm that the correct pay elements are being used for deferrals and contributions.

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Problems with matching contributions are another concern. The agency urges employers to maintain accurate payroll and employment records so that all eligible workers receive the match they are entitled to under the plan’s formula.

Plans can also run into trouble when they fail nondiscrimination testing.

“Consider a safe harbor or automatic enrollment plan design,” the IRS wrote. “Communicate with plan administrators to ensure proper employee classification and compliance with the plan terms.”

Another recurring issue is the exclusion of employees who should have been allowed to make elective deferrals. The IRS advises employers to monitor census data closely and apply participation rules consistently.

IRS explains 401(k) contribution limit mistakes

Contribution limits are another area where mistakes occur.

Savers younger than 50 can contribute as much as $24,500 to a 401(k) in 2026, up from $23,500 in 2025. Most of those 50 and older can add as much as $8,000 more — up from $7,500 in 2025 — for a maximum contribution of $32,500.

“Savers ages 60, 61, 62 and 63 have a higher catch-up cap,” wrote the AARP. “Those in this group can stash an additional $11,250 in a workplace plan, for a maximum contribution of $35,750. The SECURE 2.0 Act, a 2022 federal law designed to promote retirement saving, included a provision boosting the catch-up limit for the 60-63 set.”

The IRS reminds employers to verify that elective deferrals do not exceed the annual limits under Section 402(g) and to ensure that “excess deferrals” are properly distributed when they occur.

Timely deposits of employee deferrals are also essential. The IRS instructs employers to determine the earliest date they can reasonably segregate contributions and to establish procedures so deposits are made by that date.

The IRS warns Americans on 401(k) mistakes Americans should be careful not to make.

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Other 401(k) mistakes to avoid

Loan administration is another source of compliance problems, according to the IRS.

“Review each participant loan, including the loan amount, term of the loan and repayment terms,” wrote the IRS. “Ensure that there are procedures in place to prevent loans that are prohibited transactions under IRC Section 4975 or that don’t comply with IRC Section 72(p).”

Plans that are top-heavy must provide required minimum contributions to non-key employees. The IRS advises employers to perform a top-heavy test each year to determine whether these contributions are necessary.

Some plans fail simply because required filings are not submitted.

“Understand your filing requirement and know who filed and when,” the IRS warned. “Don’t assume someone else is taking care of it.”