The IRS recently added new questions to the 2015 Form 5500/5500-SF annual retirement plan returns. The Form 5500-Series returns are used by retirement plans to report the financial condition, investments, and operations of the plans to the DOL and IRS. When the new IRS compliance questions were originally introduced, the IRS described the questions as optional for plan year 2015. However, in its most recent instructions, the IRS has specifically advised plan sponsors not to complete these questions for the 2015 plan year. The IRS decision to delay completion is due to privacy and misreporting concerns raised by retirement plan administrators and advisors.

The new compliance questions are intended to aid the IRS in determining whether a retirement plan, such as a 401(k) plan, is in compliance with applicable law—in particular, how the plan is satisfying discrimination testing and making timely plan amendments. The new questions also ask whether the plan trust incurred unrelated business taxable income and if the plan made in-service distributions, such as hardships. Specifically, the following new lines were added:

  • Form 5500
    • Provide preparer information including name, address and telephone number.
  • Schedules H and I
    • Did the plan trust incur unrelated business taxable income?
    • Were in-service distributions made during the plan year?
    • Provide trust information including trust name, EIN, and name and telephone number of trustee or custodian.
  • Schedule R– a new Part VII: Compliance Questions
    • Is the plan a 401(k) plan?
    • How does the 401(k) plan satisfy the nondiscrimination requirements for employee deferrals and employer matching contributions?
    • If the Average Deferral Percentage (ADP) test or Average Contribution Percentage (ACP) test is used, did the plan perform testing using the “current year testing method” for non-highly compensated employees?
    • Did the plan use the ratio percentage test or the average benefit test to satisfy the coverage requirements under Section 410(b)?
    • Does the plan satisfy the coverage and nondiscrimination tests by combining this plan with any other plans under the permissive aggregation rules?
    • Has the plan been timely amended for all required tax law changes?
    • Provide the date of the last plan amendment/restatement for the required tax law changes.
    • If the plan sponsor is an adopter of a pre-approved master and prototype or volume submitter plan that is subject to a favorable IRS opinion or advisory letter, provide the date and serial number of that letter.
    • If the plan is an individually-designed plan and received a favorable determination letter from the IRS, provide the date of the plan’s last favorable determination letter.
    • Is the plan maintained in a U.S. territory?
  • Form 5500-SF (Short-Form Annual Return/Return of Small Employee Benefit Plan)
    • Asks for all the information added to the Forms and Schedules above.
    • Were required minimum distributions made to 5% owners who have attained age 70½?

When plan sponsors and plan administrators are eventually required to respond to these new questions, their responses could highlight plan compliance issues of which the plan sponsor and/or the IRS may not have been aware, and could lead to follow-up investigations from the IRS. The new questions are helpful guidance for 401(k) plan sponsors to make certain their 401(k) plans, especially 401(k) and 403(b) plans are in compliance.  Plan sponsors should consider requesting assistance from their advisors to ensure compliance questions are answered without creating heightened scrutiny from the IRS.  In addition, plan sponsors must be careful to ensure that the discussions with advisors are of a privileged nature.1