IRS Rolls Out Its 401(k) Compliance Check Questionnaire Project

Beginning May 17, 2010, the Internal Revenue Service (IRS), through its Employee Plans Compliance Unit (EPCU), began issuing compliance questionnaires to 1,200 randomly selected employers sponsoring 401(k) plans who filed a Form 5500 for the 2007 plan year. If selected, a plan sponsor has 90 days to complete and return the questionnaire.

This project was prompted by a recent baseline study, performed by the Employee Plans Examination division of the IRS, which indicated that 401(k) plans are the most noncompliant plan type in the retirement plan universe. Given that 401(k) plans make up over 60 percent of the retirement plan universe, the project was initiated to take a comprehensive look into 401(k) plans to gather information regarding potential compliance issues and the use of existing correction methods for noncompliance, and to solicit opinions regarding how to improve compliance. The IRS intends to use the information it obtains from the questionnaires to improve future compliance through enforcement and education, and to implement further safeguards to protect the nation's retirement funds.

The Questionnaire

The questionnaire is broken down into the following broad categories:

· Demographics;

· 401(k) plan participation;

· Employer and employee contributions;

· Top heavy and nondiscrimination rules;

· Distributions and plan loans;

· Other plan operations (i.e., fraud, theft, handling of employer stock and in-kind distributions);

· Automatic contribution arrangements;

· Designated Roth features;

· IRS voluntary compliance programs; and

· Plan administration.

What if You are Randomly Selected?

Recipients will receive a cover letter, instructions for completing the questionnaire online and a glossary of terms. The questionnaire is lengthy and complex. You may want to seek the assistance of your legal counsel and third-party administrator to ensure that the form is accurately completed. Additional information to assist recipients is available on the IRS Web site on the EPCU's featured project page. We recommend that plan sponsors print out a copy of the Guide to Completion of the 401(k) Compliance Check Questionnaire (Form 14146) and complete a paper version of the questionnaire before entering any data online. Legal counsel should be consulted after completing the "paper" questionnaire if a question identifies a compliance issue or failure so that any such failure can be corrected under one of the available correction methods.

Although the IRS has indicated that the questionnaire is merely a compliance check, plan sponsors are required to complete the questionnaire. A failure to do so may result in further action or examination of the plan. The IRS has issued similar questionnaires in other areas under its authority in the past, and has subsequently opened audits based on responses which indicated areas of noncompliance. Since the questionnaire is a compliance check and not an audit or investigation, the IRS's Employee Plans Correction Resolution System (EPCRS) is available to plan sponsors to address any areas of noncompliance unless and until the IRS conducts a formal audit or examination of the plan. The cost to correct under EPCRS is significantly less than if the compliance failure is detected upon IRS audit.

What if You are Not Selected?

Plan sponsors who did not receive a questionnaire can be proactive and utilize the questionnaire to perform a self-audit of their plans to determine their level of compliance with the issues the IRS is targeting and to address any areas of noncompliance. Once the IRS receives the completed questionnaires and compiles the data, it will likely start seeking out plans for examination based upon the compliance issues discovered. Self-audit permits plan sponsors to get a step-up on compliance and safeguard against subsequent IRS action that may result from this initiative.

If you have questions regarding the questionnaire, or if you desire assistance with its completion, please contact Craig Burke, or your Ice Miller LLP employee benefits attorney.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances

May 26, 2010