The Employee Retirement Income Security Act of 1974 (ERISA) is a foundational law in the U.S. governing employee benefit plans—covering retirement plans, health and welfare plans, and other employer-sponsored benefit programs. For companies that offer these benefits, ERISA compliance isn’t optional. Noncompliance can lead to:

• Substantial financial penalties

• Lawsuits from plan participants

• Unfavorable audit findings

• Reputational harm

• Possible fiduciary exposure

At Clarity Financial, we've seen too many organizations make common errors—often unintentional—that carry serious consequences. In this article, we’ll walk through the key ERISA compliance pitfalls, explain why they matter, and give concrete steps to avoid them.

What Is ERISA & Why It’s Critical to Get It Right

Briefly, some of the central elements of ERISA are:

• It mandates fiduciary duties: plan sponsors and fiduciaries must act in the best interests of participants, with loyalty, prudence, and care.

• It requires transparency: disclosures and documents must be given to participants and beneficiaries.

• It imposes reporting and record-keeping obligations, including Form 5500 and SPD (Summary Plan Description).

• It regulates eligibility, participation, vesting, funding, non-discrimination, and claims/appeals processes.

Because the law is detailed and changing, staying up to date and having good internal systems is essential.

Common ERISA Compliance Mistakes, Their Consequences, and How to Avoid Them

1. Inadequate or outdated plan documentation (Plan Document, SPD, amendments)

• Consequences: Misrepresented participant rights, penalties for failing to update or distribute SPDs, legal exposure during audits or lawsuits.

• How to Avoid: Keep a master plan document with version history, review annually, update SPDs promptly, and distribute required notices on time.

2. Missing or untimely Form 5500 filings

• Consequences: Large daily fines, potential IRS/DOL investigations, and required audits for larger plans.

• How to Avoid: Maintain a compliance calendar, work with a TPA, and confirm participant counts early to avoid last-minute surprises.

3. Failing disclosure and notice obligations

• Consequences: Regulatory fines, participant lawsuits, loss of trust.

• How to Avoid: Automate delivery of SPDs, SMMs, and SARs; keep delivery records; train HR and benefits staff on deadlines.

4. Poor fiduciary oversight

• Consequences: Fiduciaries may face personal liability, lawsuits, or DOL investigations for neglecting oversight.

• How to Avoid: Provide fiduciary training, adopt an Investment Policy Statement, review fees and providers, and document all decisions.

5. Misdefining “compensation” or eligibility rules

• Consequences: Failing nondiscrimination tests, excluding eligible employees, corrective contributions, or lawsuits.

• How to Avoid: Align payroll practices with plan documents, audit eligibility and compensation definitions, and clarify policies for hours and waiting periods.

6. Delays in depositing employee contributions

• Consequences: Fiduciary breach, penalties, and lost investment returns for employees.

• How to Avoid: Set internal controls for payroll deposits, reconcile frequently, and use automated systems for timely contributions.

7. Ignoring nondiscrimination testing

• Consequences: Favoring highly compensated employees can trigger tax issues, corrective contributions, and plan disqualification risks.

• How to Avoid: Run tests early each year, adjust contribution formulas, and design plans with fairness in mind.

8. Overlooking bonding or fiduciary liability requirements

• Consequences: Failure to secure fidelity bonds leaves plan assets unprotected and results in compliance violations.

• How to Avoid: Identify everyone handling plan assets, ensure proper bonding amounts, and review coverage regularly.

9. Not having proper claims and appeals procedures

• Consequences: Improper claim denials, litigation, and regulatory noncompliance.

• How to Avoid: Publish claims/appeals processes, train staff, and keep records of all claims and responses.

10. Failing to correct errors or relying on informal fixes

• Consequences: Penalties grow, voluntary correction opportunities are lost, and audit findings worsen.

• How to Avoid: Correct errors quickly, document fixes, and use IRS or DOL voluntary correction programs.

Real-World Examples & Costs

• Penalties per day for missing SPDs or plan documents can be up to $110/day per participant when documents are not provided after request.

• Failing to file Form 5500 or filing late may result in thousands of dollars in fines daily.

• Errors in nondiscrimination testing may force an employer to make corrective contributions for affected participants which are retroactive.

These costs are not only financial; faulty ERISA compliance can damage trust with employees, open up the business to litigation, and impose time and resource burdens for remediation.

How to Build a Robust ERISA Compliance Program

To avoid the mistakes above, here are best practices from Clarity Financial’s playbook. These steps help minimize risk and ensure you’re audit-ready.

1. Designate responsible roles.
   Assign clear ownership for plan documents, filings, disclosures, fiduciary oversight. Identify who on your HR, finance, or legal team manages each component.

2. Maintain a compliance calendar.
   Include all required filings, notices, SPD updates, nondiscrimination testing, audits. Include lead time. Use software or reminders.

3. Regular document reviews / audits.
   Annually or semi-annually review plan documents, SPDs, amendments, compensation definitions, eligibility. Consider having external counsel or ERISA specialist review every few years.

4. Train fiduciaries and staff.
   Provide training on ERISA duties, recent regulatory changes, service provider selection, fee benchmarking, investment oversight, claims procedures.

5. Use third-party experts where needed.
   TPAs, ERISA attorneys, fiduciary advisors, actuaries—especially valuable when size or complexity grows.

6. Implement strong internal controls and record keeping.
   Document all plan operations—who made decisions, when, what information was considered. Keep good financial records. Make sure payroll, benefits, legal, and HR are aligned.

7. Leverage voluntary correction programs.
   If issues are found, do not wait. Using IRS / DOL correction programs can reduce penalties. Keep documentation of what happened, how and when you fixed it.

8. Stay up to date on regulatory changes.
   ERISA rules, IRS guidance, DOL interpretations change. Monitor through newsletters, legal counsel, regulatory agencies (DOL, IRS). Subscribe to alerts.

Looking Ahead: Recent Trends & Things to Watch

• Long-term part-time employee rules. The SECURE Act brought new eligibility requirements for long-term part-time workers in some retirement plans. Ensuring eligibility definitions align is becoming more critical.

• Increased DOL audits and enforcement. The DOL continues to ramp up enforcement in employee benefit laws; plans are under more scrutiny. Robust documentation and process are key.

• Fee transparency demands. Participants expect clarity about fees charged by service providers, fund expenses, etc. Benchmarking and transparency help avoid disputes.

• Technology & automation. Tools that automate notice distribution, filings, reminders, audits are helping reduce human error. There’s an opportunity cost for companies that don’t adopt efficient systems.

Conclusion

ERISA compliance may feel complex, but letting small mis-steps slide can lead to far more expensive consequences down the road. The good news: by recognizing the common pitfalls, building strong internal systems and partnering with the right experts, you can protect your organization, your fiduciaries, and—most importantly—your employees.

If you’d like help assessing your ERISA compliance status or building a compliance framework tailored to your benefit plans, Clarity Financial is here to help. Contact Caroline Raker today for a complimentary compliance audit and plan review.