If you’re the proud recipient of one of the 1,200 questionnaires recently sent to some 401(k) plan sponsors by the Internal Revenue Service (IRS), please don’t assume that it’s just routine and ask an inexperienced employee to complete it. Sandra Feingerts, a partner with Fisher & Phillips, LLP, worries that doing so could result in an audit of your plan. Why? Because previous experience says so.
This isn’t the first time the IRS has mailed questionnaires out to a cross-section of plan sponsors. “The first time I remember seeing this kind of thing was in conjunction with universities,” Feingerts says. The IRS was concerned with compensation being paid to high-level university employees and wanted to investigate how widespread the problem might be.
Questionnaires were sent to 400 tax-exempt colleges and universities asking about their practices. Following that 2008 questionnaire, the IRS recently announced that 30 of them would soon undergo thorough audits.
As mentioned at the outset, it would not be prudent to direct someone who doesn’t possess sufficient knowledge and experience to take care of answering the questionnaire. “Some companies don’t really have a benefits specialist; they have someone who is more of a jack-of-all-trades handling benefit questions. Be careful, because you don’t want misinformation going on this questionnaire,” says Feingerts.
“So if you happen to be one of the companies getting one of these, you should review it with legal counsel. Make sure you know how you’re going to answer the questions. Go over them before you just start plugging answers into the computer and hitting the send button.”
Why Are Plans Being Scrutinized?
Feingerts says enforcement activities may be on the rise, by both the IRS and the U.S. Department of Labor. “That might explain the timing of this questionnaire,” she says. “For a number of years, this area has not had much attention from the agencies; there weren’t a lot of audits initiated. I think there is concern that people have become sloppy with their plans.”
In fact, that statement is made on the IRS website covering the questionnaire (www.irs.gov/retirement/article/0,,id=223440,00.html). There, the IRS clarifies that 401(k) plans, which make up 60 percent of the retirement universe, are thought to be less than perfect in their compliance with applicable laws and regulations.
“Employee Plans Examinations previously conducted a baseline study of 79 market segments, and the findings indicated that 401(k) plans are by far the most noncompliant plan type in the retirement plan universe,” the website reports. “… it is important to the future of the private retirement system that these plans maintain the highest level of compliance possible.”
If you receive the 401(k) questionnaire, you will have 90 days to complete the form, unless you request and receive an extension. Feingerts suggests using the form to help you identify potential compliance issues with your plan. Most compliance errors can be corrected using the IRS’ Voluntary Correction Program (VCP) or by putting the plan in the position it would have been in if the error had not occurred, she says. Before taking that position, though, make sure the situation meets the requirements for correction without submission to the VCP.