The expanding number of qualified plan requirements makes it hard to avoid inadvertent violations and the resulting penalties.

Recognizing this, the agencies enforcing the rules have established voluntary correction programs that take the sting out of non-compliance by allowing smaller penalties and approved corrections for employers that discover problems on their own. The catch is that these programs may be available only if the employer identifies a problem before it is found on an audit or as a result of a determination letter filing. Even where these programs are not available, employers can avoid a lawsuit by identifying and correcting a problem.

The following is a list of important questions for plan sponsors to ask administrators and recordkeepers in order to identify potential problems.

Has your plan document been amended for all recent law changes?

If your plan is missing required language, or if required language was not adopted in time, the IRS may assess penalties. Although it happens very rarely, disqualification results in disallowance of the employer's deductions and tax bills for participants. It is not sufficient to wait until a plan is filed with the IRS to make all required amendments.

Does your plan cover a sufficient number of employees?

To be non-discriminatory, qualified plans must cover a sufficient number of non-highly compensated employees. For 2008, that means people who earned $105,000 or less in the preceding year. Special rules may tax only highly compensated employees if this is the only reason the plan fails to qualify. Your workforce may change over time, which could mean that your plan now covers too few non-highly compensated employees. If the plan sponsor is part of a controlled group that added or sold subsidiaries, that alone may cause a plan to fail coverage testing. This is an IRS audit issue, and you can avoid big problems by extending coverage to more employees, if necessary.

Have you quickly deposited employee contributions?

This is a big issue for the Department of Labor in 401(k) plan audits. DOL rules require employers to deposit employee contributions promptly in the plan's trust. Employers may be sued for self-dealing (using employee contributions for general corporate purposes) if they violate these rules.

Have you provided employees with required notices and reports?

You file Form 5500 with the government each year. Did you file on time? The penalty could be up to $1100 for each day it was late, unless you use a correction program for late filers.

The law also requires that a summary annual report summarizing financial information in the 5500 be provided to participants each year. Many new notice requirements have also been added by recent law, including a new diversification notice for participants in certain plans holding public company stock and funding status notices. The penalty for not providing notices could be $100 or $110 per day, depending on the notice, for each participant who has not received a required document.

Are fiduciaries protected from liability for investment elections?

If proper investment alternatives and default investments are available and explained to participants, fiduciaries are protected from liability for losses caused by participant's investments. New rules on default investments and fee disclosures will have to be followed to protect your fiduciaries.

Do you have safeguards to prevent your plan from holding excess contributions?

There are annual contribution, compensation and benefit caps. Plans don't qualify if they pay benefits over the legal maximum. Excess contributions must be returned if 401(k) plans fail discrimination testing or excise taxes apply. Do your payroll provider and recordkeeper reject or refund excess contributions and properly limit benefits?

If your plan holds employer stock, have you complied with SEC requirements?

In addition to filing Form S-8 and giving participants prospectuses, plans allowing employees to invest in employer stock may have to file Form 11-K each year with the Securities Exchange Commission. Failure to file may result in penalties, as well as restrict new plan securities offerings. If employees weren't given the required prospectuses, they may also have the right to void their stock purchases.

Have you notified the people who service your plan about any plan changes?

Plan changes usually require amendments and recordkeeping changes and often must be communicated to participants. When new legal requirements come into effect, the plan's operations often must comply before formal amendments are required. In addition to jeopardizing plan qualification, failure to implement changes on time may require corrective action, such as seeking repayment of distributions.

Is your plan's operation based on the written terms of your plan document?

A qualified plan must be operated in accordance with its terms. This means that administrative procedures must reflect the plan document, and a formal plan amendment will often be required when plan rules are changed. Correcting discrepancies may involve tracking down former employees who received distributions or putting extra money into the plan.

Do you have a proper claims and appeals procedure?

Federal law requires your plan to have a claims and appeals procedure and to respond to participants who challenge benefit denials within deadlines in Department of Labor regulations. The IRS doesn't look at these provisions when it approves plans, but this is a big issue in DOL audits and when participants go to court to challenge benefit denials. Courts may refuse to give any deference to your decisions or require participants to use your procedures first if you don't have proper procedures in place.

Are your participant communications consistent with your plan document?

This is a major issue in lawsuits over benefits and when the DOL audits plans. Participants can be entitled to more expensive benefits promised in their communications if the plan and the communications conflict, and courts may refuse to recognize disclaimers stating that the plan prevails in the case of any conflict.

Are you versed in 2008 rule changes?

New rules are coming into effect in 2008, and employers need to be prepared to implement them. For example, new defined benefit plan funding requirements and new regulations on maximum benefits and contributions will apply in 2008.

If you answered "no" to questions above, there will likely be other areas of non-compliance, and a full audit of plan operations may be in order.

Carol I. Buckmann is an attorney at the New York office of Osler, Hoskin & Harcourt LLP, where she specializes in employee benefits and executive compensation.