The Internal Revenue Service (IRS) has provided clarification regarding new “compliance questions,” principally for retirement plans, that appear on the 2015 Forms 5500 and 5500-SF. These questions should not be answered.

Background

The 5500-series forms must be filed by administrators of various types of employee benefit plans, including retirement plans. When the 2015 Forms 5500 and 5500-SF and supporting schedules were released in December 2015, they included various IRS “compliance questions.” According to the instructions released with the forms, these questions were “optional,” but filers were “encouraged” to answer them.

IRS Announcement

This past Monday, the IRS posted an announcement on its website that answers should not be provided for the IRS compliance questions that have been added to the forms, because the proposed questions were not approved by the Office of Management and Budget when the forms were published. The announcement specifies — by form, schedule and line-number — the questions that should not be answered.

However, there are other questions on the 2015 forms that are designated "Compliance Questions," similar to questions that have appeared on prior years' forms. Depending on the type of filer, these questions may have to be answered. An example would be the questions in Part IV of Schedule H (except for Lines 4o and 4p, which are mentioned in the announcement as questions that should not be answered).

The instructions to the 2015 Form 5500-series have been revised to reflect what the IRS stated in the announcement. The revised instructions can be found on the website of the Department of Labor’s Employee Benefits Security Administration.

Here are examples of the subjects addressed in the IRS compliance questions referenced in the announcement:

  • Whether the plan’s trust incurred unrelated business taxable income (UBTI)
  • For a 401(k) plan, whether it satisfied the nondiscrimination requirements for employee deferrals and employer matching contributions (as applicable) under Sections 401(k)(3) and 401(m)(2) of the Internal Revenue Code (Code) using the design-based safe-harbor method or the actual deferral percentage and actual contribution percentage tests
  • For any qualified plan, whether it satisfied the minimum coverage requirements of Code Section 410(b) by using the ratio percentage test or the average benefit test
  • For any qualified plan, whether it has been timely amended for all required tax law changes
  • For an IRS pre-approved qualified plan that is subject to a favorable IRS opinion or advisory letter, the date and serial number of that letter
  • For an individually designed qualified plan that has received an IRS favorable determination letter, the date of the last such letter

Observations

The new compliance questions indicate areas in which the IRS apparently has particular concerns. In the 2015 Form 5500 instructions, the IRS states that the compliance questions in Part VII of Schedule R (to be filed by retirement plans) “are critical to the IRS to effectively focus on specific factors of the Federal tax law compliance.”

Here is how the IRS might respond to answers to certain compliance questions in connection with an examination of a Form 5500 for a qualified retirement plan, if and when answers become mandatory:

  • If the form indicates that the plan incurred UBTI for the plan year, the IRS could then check whether it filed Form 990-T. That form must be filed by any domestic or foreign organization exempt under Code Section 501(a) (which would include qualified retirement plans) if it has gross income of $1,000 or more from a regularly conducted unrelated trade or business.
  • For a 401(k) plan, if the form indicates that the plan uses the design-based safe-harbor method, the IRS might request copies of plan provisions as to safe-harbor contributions and safe-harbor notices for recent years, as well as evidence of payment of such contributions for those years.
  • If the form indicates that the plan satisfies the Code’s minimum coverage requirements by use of the average benefit test, the IRS might request supporting data.
  • If the form indicates that the plan has been timely amended for all required tax law changes, the IRS might request signed and dated copies of certain amendments. If the form indicates that the plan has not been so amended, we would expect the IRS to request an explanation.

In the interim, before answering the compliance questions is required, plan administrators may wish to use the 2015 questions as a checklist to help discover any possible compliance issues. If deficiencies are found, corrective action can be taken before any related compliance questions have to be answered. For example, if a required amendment was not timely adopted, a submission could be made under the Voluntary Correction Program (VCP) of the IRS’s Employee Plans Compliance Resolution System by paying a compliance fee and requesting a compliance statement that, in effect, approves the late adoption of the amendment. If the IRS discovers on its own that a required amendment was not timely made, the cost of compliance could be considerably greater than under VCP.