Recipients Will Have 90 Days to Complete and Return Extensive Questionnaire

Late last week, the Internal Revenue Service Employee Plans Compliance Unit (“EPCU”) announced the implementation of a new compliance initiative: the 401(k) Compliance Check Questionnaire Project (the “401(k) Compliance Project”).

Under the 401(k) Compliance Project, 1,200 401(k) plans will be selected at random from among those plans for which Form 5500 returns were filed in 2007.

Plan sponsors selected for the 401(k) Compliance Project will receive a letter that includes a 401(k) Compliance Check Questionnaire (“Questionnaire”).

The Questionnaire is 46 pages long and covers the gamut of 401(k) plan compliance issues, including:

  • Demographics
  • 401(k) plan participation
  • Employer and employee contributions
  • Top heavy and nondiscrimination rules
  • Distributions and plan loans
  • Other plan operations
  • Automatic contribution arrangements
  • Designated Roth features
  • IRS voluntary compliance programs
  • Plan administration

Plan sponsors are given 90 days in which to complete and return the Questionnaire. Given the comprehensive nature of the Questionnaire, recipients should contact their plan service providers as soon as possible to ensure that the Questionnaire can be timely and accurately completed.

Interestingly, the Questionnaire includes questions that relate to the existence (and number) of the plan sponsor’s other non-qualified deferred compensation plans. It is conceivable that answers to the Questionnaire could result in further IRS inquiries regarding these arrangements’ compliance with the requirements of Section 409A of the Internal Revenue Code.

Participation in the 401(k) Compliance Project is not voluntary. The IRS is careful to characterize the 401(k) Compliance Project as neither an audit nor an investigation. However, it is an enforcement action, meaning that failure to accurately complete and timely return the Questionnaire could result in further enforcement action, including an audit or investigation of the plan.

In many cases, compliance failures identified in the Questionnaire can be remedied – but plan sponsors will have to act quickly in order to prevent identified compliance failures from resulting in further IRS enforcement action and/or monetary penalties.

If your plan is selected for the 401(k) Compliance Project, we encourage you to contact an employee benefits attorney to answer any questions you might have about the Questionnaire – especially if you are aware of any possible unresolved 401(k) plan compliance issues.