Four Lessons from the IRS Plan Audit Webinar today

I participated today in a conference call with the IRS.  They reported on the recent plan audit questionnaire that they performed and it had a number of interesting findings.  There are now more than 500,000 401k plans in the US covering some 60 million participants.  The IRS sent out a large number of plan questionnaires, and 98% responded to them;  the 2% that did not respond, got audited!  LESSON ONE- Respond to their requests!


They looked at all areas of the plan and found concerns in  a couple of areas.  One they highlighted was LOAN COMPLIANCE.  As it turns out, during the bad economy of the last 5 years, many companies allowed more loans than their plan document allowed (They found one person had 8 loans, even though the plan document only allowed 2).  Some companies that did not allow loans had loans on the books.  LESSON TWO- you must follow your plan document.

Another Loan issue that they are looking at very closely currently is Loan Repayment.  Employees must repay the loans in a timely manner, in accordance with the written agreement they signed to take out the loan.  The questionnaires found a number of problems surrounding this.  LESSON THREE-  When an employee fails to pay as agreed, the entire amount of the loan becomes taxable to that employee.

Testing and Top-Heavy plans was another issue.  They found that many of the plans tested too late to fix any issues they found, and 20% of top-heavy plans did not do the proper correction in time.  LESSON FOUR – You have to get your census in quickly.  Testing must be done by March 15.

They found that 15% of plans reported suspension, reduction or termination of matching contributions in the last 4 years.  48% of the plans are currently Safe-Harbor or SIMPLE plans.  Only 6% of plans also maintained a Defined Benefit Plan.

For plans with Automatic Contribution Arrangements, (The employee is automatically enrolled at 3% unless they change their election) Only 7% of the employees lowered or stopped the contribution.  29% elected an amount of deferral that was higher than the default rate.


A new tool will be available – the Questionnaire self-Audit Tool, or QSAT, later this year.  This tool can help plan sponsors to find, fix and avoid costly mistakes.