Findings from IRS 401(k) Compliance Check Questionnaire

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, Feb 06, 2012
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ESOP diversificationWe have previously discussed the IRS 2010 401(k) Compliance Check Questionnaire that resulted in an IRS Audit for Plan Sponsors Who Didn't Complete the Questionnaire.  The IRS has published an interim report of the findings (Section 401(k) Compliance Check Questionnaire - Interim Report February 2012) and a chart of findings:

 Highlights of Findings 


 % of Plans

 Plan Type

 Plan is a safe harbor 401(k) 


 Plan is a SIMPLE 401(k)  


 Plan uses a pre-approved plan document 


 Employee Contributions

 Participants may change deferral elections at any time  


 Participants may change deferral elections only once a year 


 Catch-up contributions allowed 


 Designated Roth contributions allowed 


 After-tax contributions other than designated Roth allowed 


 Elective deferrals - increase in per-participant dollars from 2006-2008 


 Elective deferrals - decrease in per-participant percentages of compensation deferred from 2006-2008 


 Plan did not require distributions of contributions in excess of 402(g) limit for 2006-2008


 Employer Contributions 

Provide matching contributions 


Require one year of service to be eligible for matching contributions 


Provide nonelective (profit sharing) contributions 


Suspended or discontinued matching in 2006 


Suspended or discontinued matching in 2008 


Suspended or discontinued nonelective contributions in 2006 


Suspended or discontinued nonelective contributions in 2008 


Reduced nonelective contributions in 2006 


 Reduced nonelective contributions in 2008 


 Participation in Elective Deferral Contributions

 No service requirement 


 One-year service requirement   


 Age 21 restriction



Plan was top-heavy in 2008


Resolve top-heavy issues by making minimum contributions to non-key employees 


Nondiscrimination Testing 

Correct excess contributions within 2 ½ months following the end of the year of the excess 


Correct ADP testing failures by distributing excess aggregate contributions 


ADP test – use current year method 


ADP test – use prior year method 



Allow in-service withdrawals 


Permit hardship distributions 


Permit direct rollover distributions 


Most common form of benefit 

Lump sum

Permit participant loans 



Have investments in employer securities 


Have assets held in foreign investments


Plan Administration 

Use a third-party administrator for plan administration 


Third-party administrators are responsible for making timely plan amendments 


Third party administrators are responsible for preparation of Form 5500 


Determination Letters 

Sponsor has requested a determination letter from the IRS



 Plan sponsor is aware of EPCRS 


 Used EPCRS and found it helpful 



ESOP-related results

  • 0.37% of the plans are part of a stock bonus or employee stock ownership plan (ESOP)

  • The report cited the diversification requirements of IRC Section 401(a)(35) Diversification Regulations and found that 98% of the 401(k) plans that invested in employer stock offered diversification rights:  

Diversification Rights

Code section 401(a)(35), which was added by the Pension Protection Act of 2006, mandates diversification requirements applicable to certain defined contribution plans holding publicly traded employer securities. Ninety-eight percent of section 401(k) plans that invested in employer stock in 2006, 2007 or 2008 offered diversification rights to participants.  The frequency with which participants are able to diversify the investment of their plan accounts varies among section 401(k) plans.  The most common interval at which section 401(k) plans permit participants to sell employer securities is daily.

Code section 401(a)(35)(C) mandates that a participant who has completed at least three years of service, and the beneficiary of any such deceased participant, must be allowed to diversify the publicly traded employer securities allocated to his or her employer contribution account.  Of those plans that invested in employer stock in 2006, 2007 or 2008, most section 401(k) plans permit participants who have completed at least 3 years of service to sell employer securities immediately from nonelective employer contribution accounts or from matching contribution accounts.

The IRS also provided comments from the Director of EP Examinations, shared some frequently asked questions regarding the report, and discussed what they will do with the findings:

We’ll use the Questionnaire’s findings to:

  • enhance our 401(k) plan administration compliance tools,

  • produce outreach materials,

  • improve voluntary compliance programs,

  • assess the need for additional guidance, and

  • define upcoming projects and enforcement activities.

The final report will include information about questions not discussed in this Interim Report, as well as a breakdown of the responses based on plan size.

401(k) plan sponsors can use the Questionnaire, along with these findings, to strengthen internal controls over plan operations.

They also announced a March 6, 2012 Phone Forum on the report.

Topics: Employee Stock Ownership Plan (ESOP), ESOP diversification, IRS 401(k) compliance check questionnaire

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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