IRS Issues Interim Report about 401(k) Compliance Questionnaire

The questionnaire findings also show the impact of the 2008 market downturn on plan sponsor offerings.  The percentage of 401(k) plan sponsors that suspended or discontinued matching contributions in their plans increased from 1% in 2006 to 4% in 2008. The percentage of 401(k) plan sponsors that suspended or discontinued the non-elective contribution in their plans increased from 2% in 2006 to 5% in 2008. The percentage of 401(k) plan sponsors that reduced non-elective contributions in their plans increased from 1% in 2006 to 5% in 2008.   

From 2006 to 2008, 58% of 401(k) plans experienced a per-participant increase in the dollar amount of elective deferrals; 52% of plans experienced a per participant decrease in the percentage of compensation deferred. From 2006 to 2008, 67% of 401(k) plans that permit employees to make after-tax contributions experienced a per-participant increase in the amount of such after-tax contributions.   

Twelve hundred 401(k) plan sponsors were randomly selected to complete the 401(k) Questionnaire via a secure website. Ninety-eight percent of plans receiving the questionnaire responded. Follow-up actions were taken in the case of all non-responders.  

Forty-three percent of 401(k) plans are safe harbor plans. Five percent are SIMPLE plans.   

Eighty-six percent of 401(k) plans are some form of pre-approved plan. Twenty-three percent of plan sponsors have requested a determination letter from the IRS.   

As for plan administration, 53% of section 401(k) plan sponsors use a third-party administrator for plan administration. Third-party administrators are responsible for timely plan amendments for 73% of 401(k) plans, and are responsible for the annual preparation of the Form 5500 for 83% of 401(k) plans.

Plan Designs  

Findings from the IRS’ 401(k) Compliance Check Questionnaire show 54% of 401(k) plans provide a one-year-of-service requirement before allowing participation in the plan; 64% contain an age-21 eligibility requirement; and 13% have no eligibility requirements.   

Forty-one percent of 401(k) plans allow participants to change elective deferrals at any time. Ninety-six percent have provisions that allow catch-up contributions (statutorily allowed additional contributions) for participants age 50 and older. Twenty-two percent permit participants to make designated Roth contributions.   

Sixty-eight percent of plan sponsors provide matching contributions, and 65% provide some form of employer non-elective contribution such as a profit-sharing contribution. Fifty-eight percent of 401(k) plans contain a one-year-of-service requirement in order for participants to be eligible for matching contributions.   

The most common form of benefit in 401(k) plans is a lump sum. Sixty-two percent allow in-service withdrawals, 76% permit hardship distributions, and 79% permit direct rollover distributions.   

Seventy-six percent of 401(k) plans permit hardship distributions, and 65% allow participant loans.   

One percent of 401(k) plans allow investment in employer securities, and 1% have investments in assets held overseas.

What’s Next?  

The IRS said it will use information gathered from the 401(k) Questionnaire, in conjunction with other data, to enhance its external section 401(k) plan administration compliance tools; produce more useful outreach materials; improve voluntary compliance programs; assess the need for further formal guidance; and define some upcoming projects and enforcement activities.   

The agency encouraged 401(k) plan sponsors to use the 401(k) Questionnaire, in conjunction with the report findings, to strengthen their internal controls over plan operation and to find, fix and avoid errors in their section 401(k) plans.   

“The findings in the report could help you make decisions about your plan, including features to consider and pitfalls to avoid,” said Monika Templeman, director of EP Examinations.  

A final report will include comparisons by the plan size stratifications. These breakdowns will identify differences between small and large plans. The report will also include information on items from the 401(k) Questionnaire not analyzed in the interim report. It is targeted for release in 2012.  

The interim report is at http://www.irs.gov/pub/irs-tege/401k_interim_report.pdf.  

More information is at http://www.irs.gov/retirement/article/0,,id=253875,00.html.