The IRS recently released a new compliance tool directed at simplifying plan administrators’ understanding of 401(k) plan requirements. Publication 4531 highlights the most common mistakes IRS auditors find in the operation of plans intended to qualify under Internal Revenue Code Section 401(k). These issues are presented in an easy-to-use “Top 10” format. The simplified checklist is reproduced below and offers plan administrators a useful departure point for annual reviews of 401(k) plans and for designing internal compliance procedures.
1. Has your plan document been updated within the past few years to reflect recent law changes?
If your plan has not been updated to reflect EGTRRA, the plan needs to be revised. |
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6. Have you timely deposited employee deferrals each pay period?
You are required to deposit deferrals as soon as they can be segregated from the employer’s assets. Most employers deposit salary deferrals when making payroll tax deposits. |
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2. Have you notified the people who service your plan of any plan changes?
Notify plan servicers right away with any changes in the form or operation of your plan, including acquisition or ownership changes affecting the employer. |
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7. Have you identified all your highly compensated employees and key employees, including owners and their family members, so that your TPA can perform your nondiscrimination tests?
Failure to provide this information prevents your TPA from properly performing your nondiscrimination tests. |
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3. Is your plan’s operation based on the definitions and requirements (terms) written in your plan document?
Failure to follow the terms of the plan is a common problem encountered on audit. |
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8. Have the 401(k) nondiscrimination tests (ADP, ACP, and Top-Heavy) been performed counting all eligible employees?
You may not need to – find out how a safe harbor 401(k) plan may allow you to completely avoid these tests. |
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4. Were all eligible employees identified and given the opportunity to make an elective deferral election?
By supplying your third-party administrator (TPA) or advisor with information regarding all employees who receive a Form W-2, you may reduce the risk of omitting eligible employees. |
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9. Have you filed a Form 5500 series return, and have you distributed a summary Annual Report (SAR) to all plan participants this year?
Responsibility for filing the Form 5500 and distributing the SAR lies with you, the plan sponsor. |
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5. Is the plan’s definition of compensation used for all deferrals and allocations?
Because your plan may use different definitions of compen-sation for different purposes, it’s important that you apply the proper definition in a consistent manner when dealing with deferrals and allocations. |
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10. Are elective deferrals limited to the amounts under IRC 402(g) for the calendar year?
Elective deferrals are limited to $15,000 for 2006, including any designated Roth contributions made by participants, and exclusive of any catch-up contributions |
If you answered “NO” to any of the preceding questions, you may have a mistake in the operation of a plan that could jeopardize qualification. No need to panic, however – most of the problems highlighted by the checklist can be remedied through the IRS self-correction procedures. We have helped many clients make internal corrections without IRS involvement and, when necessary, assisted them in obtaining IRS approval of a correction.
The online version of the checklist can be found at http://www.irs.gov/pub/irs-tege/pub4531.pdf where each of the issues highlighted is linked to a more in-depth discussion of the issue and to additional resources that are available elsewhere on the IRS’s website. It is important to note that the checklist is not intended be used as a substitute for annual comprehensive plan review and that plan administrators should work with counsel when conducting 401(k) compliance reviews.
