Approximately 1,200 randomly selected 401(k) plan sponsors received letters, sent during the week of May 17, from the IRS Employee Plans Compliance Unit asking them to complete a 401(k) Compliance Check Questionnaire.

In the letter, the IRS identifies its “ongoing efforts to increase voluntary compliance” related to 401(k) plans. The Compliance Check will allow the IRS to determine (1) potential compliance issues, (2) plan operational issues and (3) education and outreach guidance that may be helpful for the IRS to provide to plan sponsors to improve compliance.

Although a paper copy is available, the Questionnaire is being conducted via the Internet through the IRS website. The Questionnaire covers a number of topics, including:

  • Demographics,
  • Plan participation,
  • Plan contributions (both employer and employee),
  • Top-heavy and non-discrimination rules,
  • Distributions and plan loans,
  • Other plan operations,
  • Automatic contribution arrangements,
  • Designated Roth features,
  • IRS voluntary compliance programs, and
  • Plan administration.

Plan sponsors generally have 90 days from the receipt of the IRS letter to complete the Questionnaire. A number of the questions may require coordination with outside service providers (i.e., third-party administrators, accountants, etc.) due to the detailed nature of the Questionnaire.

The IRS has stated that it will issue a report describing the responses, identifying areas where more focused education, guidance and outreach is needed. The report will also identify how the IRS can utilize its enforcement efforts to address and/or avoid non-compliance issues.

Significantly, for those plan sponsors who are unlucky enough to receive a Compliance Check letter from the IRS, while participation in the Compliance Check technically is voluntary and is not an audit or investigation, failure to respond should be expected to result in further action, including a full audit/examination of the plan. For these reasons, plan sponsors who receive the IRS letter should take immediate action so that they properly and timely complete the Questionnaire. Plan sponsors should be forewarned, however, that problems identified in the Questionnaire could also lead to further enforcement action by the IRS.

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