IRS Begins Sending 401(k) Tax Compliance Questionnaires

Frank Pasacreta– Assurance and Advisory Services

In March, the Internal Revenue Service began sending questionnaires to plan sponsors regarding their compliance with tax rules covering 401(k) plans. The questionnaire is designed to assess the level of tax compliance being practiced and to determine what types of compliance issues need to be addressed by the IRS. Areas of focus, among others, include salary deferral rates, eligibility standards, and compliance with nondiscrimination rules.

It is expected questionnaires will be sent to a sample of several thousand plans, including plans of all sizes over the next few months in order to provide the IRS with a good cross-section of plans throughout the country. The questionnaire is a first for the IRS which usually gathers this type of information through routine audits of the annual Form 5500 and its voluntary compliance program. To date, the IRS has noted significant noncompliance in 401(k) plans resulting primarily from a lack of internal controls at the plan sponsor from its plan audits and compliance reviews.

What should you do if you are a lucky recipient of the questionnaire? Do not panic! The questionnaire is designed to highlight the tax reporting and fiduciary duties a plan sponsor is responsible for. Please contact Frank, Rimerman and your third party administrator for assistance in preparing your plan’s responses. If you suspect your plan may have failed to comply with certain tax laws, your plan should use the IRS’ voluntary compliance program to correct any deficiencies and pay a set fee. Plan sponsors can avoid having the same issues raised during an IRS audit, which typically can result in large penalties.