In May, the Internal Revenue Service (IRS) contacted about 1,200 401(k) plan sponsors and asked them to complete a long and detailed online questionnaire about their 401(k) plans. The IRS selected these sponsors at random from plans that filed a Form 5500 for the 2007 plan year. For many, receiving the letter is an abrupt introduction to the IRS’ new “401(k) Compliance Check Questionnaire Project” run by its Employee Plans Compliance Unit (EPCU). A copy of the questionnaire is available at http://www.irs.gov/pub/irs-tege/epcu_401k_questionnaire.pdf. The IRS has requested that plan sponsors selected to complete the questionnaire to do so within 90 days of the date of the letter. For most sponsors, that deadline falls in mid-August.

The questionnaire is divided into ten categories:

• Demographics
• 401(k) plan participation
• Employer and employee contributions
• Top heavy and nondiscrimination rules
• Distributions and plan loans
• Other plan operations
• Automatic contribution arrangements
• Designated Roth features
• IRS voluntary compliance programs
• Plan administration

Responses are required to be based on data as of the end of the 2008 plan year and to be factually accurate.

 

Action Steps if You Received a Questionnaire

If you received a questionnaire, we recommend responding to the questionnaire promptly. Although there is no fine for failing to complete the questionnaire, the IRS has indicated that failure to respond to the questionnaire or to provide complete information will result in further enforcement action which may include a formal examination of the 401(k) plan.

Due to the legal implications of responses to the questionnaire, we recommend that if you received a questionnaire you consult with your legal counsel before responding to help you respond accurately and completely while still minimizing exposure.

Many plan sponsors who respond to the questionnaire will identify qualification errors – that is the purpose of the questionnaire. These sponsors should correct these errors promptly under the IRS’s Self-Correction Program or the Voluntary Correction with Service Approval Program of the Employee Plans Compliance Resolution System (EPCRS). Correction under EPCRS is likely to save the plan sponsor the increased fees and penalties if these qualification failures are identified during an IRS examination. Even if a plan sponsor does not uncover any qualification failures in response to the questionnaire, it may discover areas in its plan administrative procedures and processes that can be improved.

For example, questions 19 and 20 of the questionnaire relate to the ADP/ACP nondiscrimination tests. If a non-safe harbor 401(k) plan failed its ADP/ACP test for the 2007 plan year but did not correct that failure, an accurate response to the questionnaire will require the plan sponsor to identify that failure. (The questionnaire asks for such information as the average deferral and average contribution percentages for highly compensated employees and non-highly compensated employees, whether the ADP/ACP tests results required correction in the 2006, 2007 and/or 2008 plan years, and the correction method(s) used in the applicable plan years.)

Action Steps if You did not Receive a Questionnaire

Even if you did not receive a questionnaire, the IRS’s new focus on 401(k) plan compliance is a reminder of the need to operate 401(k) plans in strict compliance with applicable tax rules. If the IRS audits a 401(k) plan and finds errors, the cost to the plan sponsor of correcting the errors and paying the penalties to the IRS can be significantly greater than if the plan sponsor identifies and corrects the errors on its own. For many plan sponsors, periodic self-audits can help resolve compliance issues before the cost of correction snowballs. The questionnaire gives a helpful blueprint of what to look for in reviewing your 401(k) plan’s operation.

Background on the Questionnaire Project

The IRS intends its 401(k) Compliance Check Questionnaire Project to be a comprehensive study of 401(k) plans that the IRS hopes will help it identify areas of noncompliance, understand the reasons for noncompliance and consider related operational issues. The questionnaire is not an audit or a review of the plan sponsor’s records or books. Instead, the IRS intends to use information gleaned from the questionnaire to develop education and outreach materials as well as to focus its future enforcement efforts. The IRS says it will issue a report summarizing the information it collects from the questionnaires, and that it will maintain the confidentiality of the individual plan sponsors.