IRS Launches 401(k) Compliance Check Questionnaire Project

May 20, 2010

The IRS announced a new initiative in support of its continued compliance efforts directed at the retirement plan community. Beginning in mid-May, 1,200 sponsors of 401(k) plans will receive compliance questionnaires from the IRS requesting plan design and operations data ranging from plan demographics to eligibility, contribution and distribution features, as well as several “opinion” questions.

According to IRS reports, recent baseline surveys of 79 market segments reveal that 401(k) plans are by far the most non-compliant plan type in the retirement plan universe. Considering that 401(k) plans make up 60% of that universe, the retirement security of a significant portion of today’s working population hinges on maximizing the highest level of compliance possible for 401(k) plans.

The Questionnaire

Contents. Developed by a team of agents from across the IRS Employee Plans compliance spectrum, the 401(k) questionnaire is designed to gather current plan design and operations data related to the following broad compliance topics:

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

Within each broad topic, survey participants will find a significant range of questions. For example, questions 9 and 10 on the survey, relating to enrollment eligibility, contain nearly 20 individual subparts. The print copy of the questionnaire is 46 pages in length.

Due to the complexity and scope of the questionnaire, recipients will also receive a separate glossary of terms utilized in the questionnaire containing almost 100 definitions.

Selection Process. The IRS reports that 1,200 401(k) plan sponsors were selected at random to participate in the survey, based on recent Form 5500 filings. The IRS has not indicated whether it will request supplemental responses from the baseline sample group or if it plans to perform additional rounds of surveys following the inaugural questionnaire operation.

Mandatory Participation. The IRS cautions that a plan sponsor’s receipt of a questionnaire in no way suggests identification of compliance issues with respect to a particular plan. In fact, according to the IRS, receipt of a questionnaire does not even suggest the potential for a plan review or audit. However, despite these assurances, the cover letter included with the questionnaire materials notes that failure to complete the questionnaire will result in further action which may include a full plan examination.

Plan sponsors should be aware that as part of a separate IRS initiative, the agency recently issued an interim report on the results of a questionnaire that it had sent to 400 colleges and universities. In that report the agency noted ominously that the institutions that had failed to respond to the questionnaire had been “sent to EO Examinations”. See IRS Releases Interim Report on College and University Questionnaire.

Response Process. Recipients of the questionnaire will receive a package from the IRS containing instructions for completing the questionnaire online, a glossary of terms, a cover letter, and other forms. Recipients will have 90 days to complete the survey and submit their responses online, as detailed in the questionnaire’s cover letter. Because the questionnaire solicits complex data across the entire scope of plan operations, it is likely that respondents will require substantial assistance from TPAs, accountants, attorneys, and other professional service providers in order to successfully complete the questionnaire.

Next Steps. Upon receipt of a questionnaire package, plan sponsors should consider immediately contacting their employee benefit plans counsel and their TPA, as well as the appropriate internal resources performing plan operations and support.

If an employer uncovers problems while completing the questionnaire, it should act quickly to correct them through one of the IRS-approved correction programs. Since the questionnaire is not an audit, several of those programs permit correction at a fraction of the cost that would be incurred if the problem is exposed on audit.

If You Do Not Receive a Questionnaire

For those fortunate employers that do not receive a questionnaire package, this is an opportunity to use the questionnaire to review their 401(k) plans and to determine their level of compliance with the issues that the IRS deems to be important. The agency invariably will issue interim and/or final reports summarizing the responses to the questionnaire, and sponsors will be able to compare those findings to their own plans.

Whether you receive an IRS questionnaire package for your plan or not, please contact one of the authors or any other member of our Employee Benefits team if you have any questions concerning the matters discussed in this article or need any assistance in connection with your plan.