IRS Begins 401(k) Plan Compliance Project and Your Participation Is "Voluntary"

This month the IRS begins a new compliance project and this time the target is 401(k) plans. Based on an internal study, the IRS determined that "401(k) plans are by far the most non-compliant plan type in the retirement plan universe." The project will enable the IRS to focus its enforcement efforts on specific areas of non-compliance.

The IRS has announced it will mail questionnaires this month to 1,200 plan sponsors randomly selected from the pool of plan sponsors who filed a 2007 Form 5500 for a 401(k) plan.  The questionnaire is 45 pages with approximately 69 questions covering nine compliance areas. There are no hints within the questionnaire of the correct answers and some questions include possible responses that cannot be correct in any situation. Several questions could take a little time to answer because the underlying data (which spans as many as four years) may not be easily accessible. But don't worry. We understand you'll be given 90 days to answer the questions and return the questionnaire - even more time if you obtain an extension.

Most 401(k) plan sponsors won't receive a questionnaire. Those who don't might want to obtain a copy anyway and use it to perform a self-audit of their plan. Your plan may be in trouble if you can't answer the questions, or you can answer them but aren't sure why they were asked. To view and print a copy of the questionnaire, click here. If you are one of the lucky recipients of a questionnaire, your response to it is "voluntary." However, if you don't respond, it's entirely possible (if not likely) that the IRS will follow up your lack of interest with an audit of your plan. On the other hand, if you receive a questionnaire and intend to respond, you may wish to address any errors unearthed during your review of the questionnaire before returning your response to the IRS.    

The 401(k) compliance check questionnaire will be daunting for plan sponsors who do not speak
401(k) and do not have the time to carefully answer the questions. It may also be a harbinger of what lies ahead for all 401(k) plan sponsors.