Even experienced benefits pros can struggle to keep on top of the feds’ arcane 401(k) reporting requirements and special-case distribution rules.

Here’s how to handle four areas where people often get tripped up:

1. Year-end 401(k) enrollment

Suppose you hired an employee in late December and he enrolled immediately in the 401(k) plan.  His first contribution to the plan likely came out of a January check.

So should you count him in your 2008 plan report or wait until you file your 2009 report?

Answer: The feds say to wait until 2009 for record-keeping purposes, because he had no 2008 compensation from which he could make a salary deferral.

2. Distribution without consent

Generally speaking, you must contact a former employee for verification before making any 401(k) distribution over $5,000. But there are exceptions:

• distributions of under $5,000 made after age 65 (although best practice is to notify the retiree anyway), and
• situations where you’re unable to get current contact information for the person after at least four unsuccessful contact attempts.

In the latter case, keep in mind that your firm has limited choices for distributing the money. One legal option: transfer the money to a state unclaimed-property fund.

3. Contributions not withheld

What if an employee signs up for the 401(k) but, due to a clerical error, the money was never deducted from the person’s paycheck?

 Here’s how to straighten it out: The IRS requires your firm to make the missing contribution on behalf of the employee, plus any related matching contributions.

Finally, you must also make up for any lost earnings on the money the employee intended to invest.  Bottom line: This is a very expensive mistake to fix, but once its done, your firm is back in ERISA’s good graces.

4. Small refunds

Suppose Payroll accidentally took out a little too much money. Example: The department took out an extra $10 per check for three checks before someone caught the mistake.

Are you required to issue a $30 refund to the employee? Yes.

Earlier this year, the U.S. Supreme Court issued a ruling that could cause a deluge of 401(k) lawsuits.

The court ruled to allow employees who lose money in their 401(k) or similar retirement plans to sue their employers if the money loss occurred due to uncorrected administrative errors or intentional misconduct by the plan managers.

In plain English, the court ruled that employers are expected to manage employees 401(k) money with the same care they’d take to protect their own money. In some cases, this means protecting the security of employees’ retirement funds even if it comes at the financial expense of the company itself.

The biggest change the Supreme Court ruling brings about is that now individual employees can sue employers over 401(k)s that go bad. In the past, employees could file class-action suits against their employers, but could not sue as individuals

Legal experts predict a flood of lawsuits in the near future. Here are three common issues that employee lawyers could target:

• High-fee mutual funds. If your 401(k) offers a collection of mutual funds thatre largely more expensive to buy, yet consistently perform below lower-fee funds, the firm could be liable under ERISA if the problem isn’t corrected.

• Undisclosed financial relationships. ERISA requires plan fiduciaries to inform participants of any financial benefits gained from their contributions to the 401(k) plan investments. Where this gets tricky: Sometimes 401(k) vendors name third-party trustees. Such arrangements appear in the fine print of service contracts. Under ERISA, its up to you as plan sponsor to make a good-faith effort to learn about any outside partys relationship to the vendor and see if potential kickbacks could influence investment choices and returns.

• Over-investment in company stock. Firms are vulnerable when 401(k) matches are paid in company stock or similar options that holders cant sell for a specified length of time. Reason: Such arrangements make trustees responsible for stepping in and preventing catastrophic losses to participants.

The unavoidable ups and downs of the market are NOT a legit reason for a lawsuit. However, plan sponsors can’t simply let employees’ accounts tank without reviewing the performance of the plan and exploring viable options.