Findings from IRS 401(k) Compliance Check Questionnaire
We have previously discussed the IRS 2010 401(k) Compliance Check Questionnaire that resulted in an IRS Audit for Plan Sponsors Who Didn't Complete the Questionnaire. The IRS has published an interim report of the findings (Section 401(k) Compliance Check Questionnaire - Interim Report February 2012) and a chart of findings:
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Highlights of Findings
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Response
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% of Plans
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Plan Type
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Plan is a safe harbor 401(k)
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43%
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Plan is a SIMPLE 401(k)
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5%
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Plan uses a pre-approved plan document
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86%
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Employee Contributions
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Participants may change deferral elections at any time
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41%
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Participants may change deferral elections only once a year
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2%
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Catch-up contributions allowed
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96%
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Designated Roth contributions allowed
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22%
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After-tax contributions other than designated Roth allowed
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4%
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Elective deferrals - increase in per-participant dollars from 2006-2008
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58%
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Elective deferrals - decrease in per-participant percentages of compensation deferred from 2006-2008
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52%
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Plan did not require distributions of contributions in excess of 402(g) limit for 2006-2008
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94%
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Employer Contributions
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Provide matching contributions
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68%
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Require one year of service to be eligible for matching contributions
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58%
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Provide nonelective (profit sharing) contributions
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65%
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Suspended or discontinued matching in 2006
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1%
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Suspended or discontinued matching in 2008
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4%
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Suspended or discontinued nonelective contributions in 2006
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2%
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Suspended or discontinued nonelective contributions in 2008
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5%
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Reduced nonelective contributions in 2006
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1%
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Reduced nonelective contributions in 2008
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5%
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Participation in Elective Deferral Contributions
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No service requirement
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13%
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One-year service requirement
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54%
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Age 21 restriction
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64%
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Top-Heavy
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Plan was top-heavy in 2008
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20%
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Resolve top-heavy issues by making minimum contributions to non-key employees
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79%
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Nondiscrimination Testing
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Correct excess contributions within 2 ½ months following the end of the year of the excess
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50%+
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Correct ADP testing failures by distributing excess aggregate contributions
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59%+
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ADP test – use current year method
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60%
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ADP test – use prior year method
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31%
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Distributions
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Allow in-service withdrawals
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62%
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Permit hardship distributions
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76%
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Permit direct rollover distributions
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79%
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Most common form of benefit
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Lump sum
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Permit participant loans
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65%
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Investments
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Have investments in employer securities
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1%
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Have assets held in foreign investments
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1%
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Plan Administration
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Use a third-party administrator for plan administration
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53%
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Third-party administrators are responsible for making timely plan amendments
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73%
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Third party administrators are responsible for preparation of Form 5500
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83%
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Determination Letters
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Sponsor has requested a determination letter from the IRS
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23%
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EPCRS
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Plan sponsor is aware of EPCRS
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65%
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Used EPCRS and found it helpful
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50%+
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ESOP-related results
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0.37% of the plans are part of a stock bonus or employee stock ownership plan (ESOP)
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The report cited the diversification requirements of IRC Section 401(a)(35) Diversification Regulations and found that 98% of the 401(k) plans that invested in employer stock offered diversification rights:
Diversification Rights
Code section 401(a)(35), which was added by the Pension Protection Act of 2006, mandates diversification requirements applicable to certain defined contribution plans holding publicly traded employer securities. Ninety-eight percent of section 401(k) plans that invested in employer stock in 2006, 2007 or 2008 offered diversification rights to participants. The frequency with which participants are able to diversify the investment of their plan accounts varies among section 401(k) plans. The most common interval at which section 401(k) plans permit participants to sell employer securities is daily.
Code section 401(a)(35)(C) mandates that a participant who has completed at least three years of service, and the beneficiary of any such deceased participant, must be allowed to diversify the publicly traded employer securities allocated to his or her employer contribution account. Of those plans that invested in employer stock in 2006, 2007 or 2008, most section 401(k) plans permit participants who have completed at least 3 years of service to sell employer securities immediately from nonelective employer contribution accounts or from matching contribution accounts.
The IRS also provided comments from the Director of EP Examinations, shared some frequently asked questions regarding the report, and discussed what they will do with the findings:
We’ll use the Questionnaire’s findings to:
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enhance our 401(k) plan administration compliance tools,
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produce outreach materials,
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improve voluntary compliance programs,
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assess the need for additional guidance, and
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define upcoming projects and enforcement activities.
The final report will include information about questions not discussed in this Interim Report, as well as a breakdown of the responses based on plan size.
401(k) plan sponsors can use the Questionnaire, along with these findings, to strengthen internal controls over plan operations.
They also announced a March 6, 2012 Phone Forum on the report.