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.