The IRS has announced a new initiative in which it will send a comprehensive questionnaire to 1,200 plan sponsors to review the administrative compliance of each sponsor’s 401(k) plan. Though responding to the questionnaire is technically voluntary and the questionnaire is not an audit, an employer should carefully review its response. Based on similar initiatives, the IRS has used the responses to questionnaires (or the failure to respond) as the basis for initiating formal audits. An employer receiving the questionnaire will have 90 days to complete it, but can ask for an extension. Employers should consult with relevant individuals and advisors who are involved with the administration of the plan when preparing responses to the questionnaire. To minimize the risk that an improper answer will trigger a formal audit, legal counsel review of the response is recommended.
An employer should also consider conducting a self-audit of its 401(k) plan to determine whether the plan complies with all legal requirements. Many issues that are discovered in a self-audit can be corrected through the IRS’s Employee Plans Correction Resolutions System (“EPCRS”). The cost to correct errors in plan administration is significantly greater if the errors are identified during an IRS audit of a plan.