401(k) plans continue to top the list of IRS examination priorities according to Thomas Petit, Acting Director of IRS Employee Plans division. This follows the final report on findings made as a result of the 2010 IRS Compliance Questionnaire initiative which involved 1,200 randomly selected plans. Plan sponsors were asked a set of questions about plan contributions, testing, distributions/loans, and on-going administration, including correction of plan errors. IRS concluded that there is still a number of ‘recurring errors’ that require continued focus. The biggest offenders on the list were:

• Document errors: late or missing amendments;
• Not following the plan document provisions in operation of the plan;
• Failing non-discrimination tests;
• Missing the mark with plan limits;
• Not depositing employee elective deferrals timely

We prepared a set of questions you can use to diagnose and treat possible plan ailments before they become a bigger problem and/or get identified during plan audit:

1. Have you updated your plan document to comply with the changes in the tax code? Have you timely signed the amendments and retained them in your plan records?
Major changes in retirement plan law and tax regulations require modification of plan document language and procedures by specific deadlines spelled out by the IRS. Plan sponsors need to timely execute and keep copies of all plan documents for the life of the plan. At some point, during an audit or in the course of plan merger/termination, the plan sponsor may be required to demonstrate compliance with current and prior law, a complete document file helps accomplish this task. Among the most recent major changes, frequently referred to by their acronyms, are GUST, which encompassed a set of Acts which came into effect between 1994 and 2000, EGTRRA of 2001, and PPA of 2006. In May 2014, the IRS opened a new compliance window requiring all defined contribution plans to be rewritten, or restated, to align their terms with the requirements of the Pension Protection Act of 20016 (PPA ’06). It’s a perfect time to do a thorough document check. Click here to read more about the PPA Restatement.
2. Do you understand how your plan works? Are you managing the plan consistent with its terms?
Failure to follow the terms of the plan document is the most common mistake made by plan sponsors. In order to operate the plan accurately, understanding its provisions is key. Of equal value is establishing proper administrative procedures. Does your client have clarity about the plan’s eligibility and entry requirements? What happens when an employee becomes eligible? Is your client aware of the loan procedures under the plan? Are these procedures followed properly for the owner and non-owner employees? Does your client know applicable plan limits?
3. Does your plan cover a sufficient number of the rank-and-file employees? Have there been or do you anticipate changes in business ownership? Have there been or do you anticipate changes in your workforce?
Non-discrimination is a key trait of a qualified retirement plan and, therefore, is frequently a focus of IRS audit and enforcement efforts. In order to assure compliance with this tenet, the Internal Revenue Code contains a number of tests. For a plan to be non-discriminatory, a certain level of benefits should be extended to a specific percentage of eligible non-owner employees.
Changes in employee census, such as new hires, terminations, rehires, addition of business associates, transactions (mergers, acquisitions, sales) should be communicated to the third-party administrator as quickly as possible to assess the impact of those events on the plan’s operation. Ownership of other businesses, either direct or indirect (such as through family attribution), may also have a significant impact on non-discrimination testing and should be properly disclosed for plan administration purposes.
4. Have all eligible participants been notified about their eligibility and informed about their rights under the plan?
It is not uncommon for employees working on a part-time basis or those electing not to make salary deferrals to be automatically considered ineligible. The retirement plan document spells out who is considered to be an eligible employee based on exact eligibility and participation standards specified by the Internal Revenue Code. Determination of eligibility becomes more complex when leased, contracted or shared employees are involved, and therefore help of a properly trained retirement professional becomes crucial. All newly eligible participants should be notified and educated about their benefits, rights, and responsibilities under the plan. It is good practice to establish a communication procedure to ensure consistency and completeness.
5. Have you timely deposited employee salary deferral contributions?
Employer is responsible for timely deposit of salary deferrals to the plan. The DOL’s rules require that deferrals are deposited into the plan trust on the earliest date that these amounts can be segregated from the employer’s general assets, but in no event later than the 15th day of the following month. The 15th day of the month is the latest deadline and is not considered to be a safe harbor. Employee contributions to a retirement plan with less than 100 participants are deemed made timely as long as they are deposited within 7 business days from the day they were withheld. Depositing salary deferral contributions on the date of the payroll tax transmission for that pay period has been frequently used as a recommended best practice. Failure to timely deposit employee salary deferrals may be considered a prohibited transaction.
6. Have you provided all eligible participants with the required annual notices and statements?
Qualified plans require that certain plan information be made available to plan participants and beneficiaries:
Summary Plan Description (SPD) is a document distributed to participants to communicate their benefits, rights and responsibilities in plain language. SPD should be provided to all new participants and beneficiaries.
Summary of Material Modifications (SMM) advises plan participants of amendments made to the plan. It should be distributed no later than 210 days after the end of the plan year in which the change was made.
Summary Annual Report (SAR) is a narrative of plan’s financial information outlined on the Form 5500; this report must be made available to all defined contribution plan participants on an annual basis.
Individual Benefit Statements provide information about participant’s account balances and explain what portion of those benefits is vested, or owned, by plan participant. They should be distributed at least quarterly for participant-directed accounts and at least annually for the trustee-directed accounts.
Blackout Notice should be provided to all profit-sharing plans with or without a 401(k) feature 30 days in advance of any plan activities that may restrict participants’ access to plan funds. Examples of such plan activities include change of investment options, transfer to a different investment platform, or mergers/acquisitions.
Ready to Help
Compliance with the qualified retirement plan rules and regulation can be a very daunting task; it’s no surprise that plan sponsors find it difficult at times to avoid inadvertent mistakes. Good news is that as long as the plan sponsor identifies the problems prior to an IRS audit, these mistakes can be fixed using self-correction (SCP) and voluntary correction (VCP) programs at a significantly reduced compliance fee. As you work through this questionnaire, we invite you to reach out to one of our retirement solutions consultants. We will help you navigate the complexities of the qualified planning world and proactively address the hot buttons before they become areas of concern.