Random Sampling: IRS 401(k) Compliance Check Questionnaire Project Launched

By Stephen R. Miller and Maureen O'Brien, of McDermott Will & Emery LLP May 26, 2010

The Internal Revenue Service launched its 401(k) Compliance Check Questionnaire Project in May 2010. As part of the project, the IRS will contact 1,200 sponsors of 401(k) plans that filed Form 5500-series annual reports for the 2007 plan year. Plan sponsors will be contacted based on a random sampling, according to the IRS. Once contacted, plan sponsors are required to complete an online questionnaire.

Plan sponsors should complete the questionnaire carefully, legal experts advise. The information gathered from the questionnaire will be used in a report published by the IRS identifying areas in which further education, guidance or outreach is needed.

Possible Enforcement Action

The IRS has stated that the questionnaire is not an audit or an investigation. However, failure of a plan sponsor to complete the questionnaire will result in enforcement action. On the other hand, based on recent IRS compliance projects in other areas, experts say it is reasonable to assume that questions answered in a manner that suggests non-compliant practices may trigger additional IRS scrutiny, including an audit or investigation.

The questionnaire contains questions pertaining to the 2006, 2007 and 2008 plan years in the following categories:

Demographics (plan features, other plans maintained by the plan sponsor, most recent favorable opinion or determination letter).

401(k) plan participation (number of employees, number of participants, age and service restrictions, type of plan participant).

Employer and employee contributions (matching contributions, non-elective contributions, deferral contributions and after-tax contributions).

Top heavy and nondiscrimination rules (actual deferral percentage / actual contribution percentage testing and corrections, top heavy contributions).

Distributions and plan loans (forms of distributions, hardship rules, plan loan rules).

Other plan operations (employer stock, foreign investments, in-kind distributions).

Automatic contribution arrangements (type of automatic contribution arrangement, default investments).

Designated Roth features (number of participants making Roth contributions, rollover features).

IRS voluntary compliance programs (use of the Employee Plans Compliance Resolution System and 401(k) Fix-It Guide).

Plan administration (amendment procedures, administrative procedures).

Stephen R. Miller is counsel in the law firm of McDermott Will & Emery LLP and is based in the firm’s Chicago office. He focuses his practice on the area of employee benefit matters for corporations and self-employed individuals, including the adoption and qualification of pension and profit sharing plans, employee welfare benefit plans and trusts, ESOPs and executive compensation issues. Maureen O'Brien is counsel in the firm's Chicago office. She focuses her practice on advising clients on a broad range of employee benefits matters, including qualified plan design, welfare plan design, employee benefit plan compliance issues, fiduciary matters, multiemployer pension plan issues and nonqualified deferred compensation plans.

© 2010 McDermott Will & Emery LLP. All Rights Reserved.

This article should not be construed as legal advice.

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