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IRS Publishes Interim Results of 401(k) Compliance Questionnaire

    Client Alerts
  • March 02, 2012

In February, the Internal Revenue Service ("IRS") released an interim report of responses to its 401(k) Compliance Check Questionnaire. The interim report summarizes the responses from approximately 1,200 randomly selected 401(k) plan sponsors that filed Form 5500 for the 2006 through 2008 plan years. The questionnaire focused on demographics, plan participation, contributions (both employee and employer), Roth features, distributions and loans, top-heavy and nondiscrimination testing, correction programs and plan administration.

Many responses showed the impact of the economic downturn on contributions. For example, the percentage of plan sponsors that suspended or discontinued matching contributions increased from 1% in 2006 to 4% in 2008, and the percentage of plan sponsors that suspended or discontinued nonelective contributions increased from 2% in 2006 to 4% in 2008.
The questionnaire also tracked employee participation and contribution rates, finding that from 2006 to 2008 58% of plans experienced a per participant increase in the dollar amount of elective deferrals but a 52% decrease in the percentage of compensation deferred. The survey results also show a 67% increase in the amount of after-tax contributions for plans that permit them.

In addition, the interim report provides helpful statistics regarding common plan design features. A few notable findings including the following:

• 43% of 401(k) plans are safe harbor plans.
• More plans require employees to meet age and/or service conditions to receive employer contributions than to make employee contributions.
• 41% of plans allow participants to change elective deferrals at any time, 96% allow catch-up contributions, and 22% allow participants to make after-tax Roth contributions.
• 68% of plan sponsors provide matching contributions, and 65% provide some form of employer nonelective contribution.
• 62% of plans allow in-service withdrawals, 76% permit hardship distributions, 65% allow participant loans, and 79% permit direct rollovers.
• The most common form of benefit payment from a 401(k) plan is a lump sum.
• Only 1% of 401(k) plans allow investment in employer securities.

The IRS encourages employers to use the information provided in the interim report to strengthen internal controls over plan operations and to find, fix and avoid plan errors.
Plan sponsors may immediately find the interim report helpful in comparing their plan to others across the country in order implement design changes this coming year. Plan sponsors, however, should be on the lookout for the final report, which provide additional information based on plan size and is expected to be published in December 2012.

Plan sponsors can find more information about the questionnaire and the interim report here.