401(k) plans remain EP exam priority, IRS official tells ASPPA

401(k) plans remain one of the top IRS examination priorities, according to Thomas Petit, Acting Director of IRS Employee Plans (EP). Petit spoke on June 5, 2014 at the American Society of Pension Professionals & Actuaries (ASPPA) Regional Conference in Chicago.

Exam projects

In March 2013, the IRS issued a final report on the results of its 401(k) plan questionnaire. The final report has triggered EP Exam Projects and Employee Plans Compliance Unit (EPCU) projects, Petit noted.

An Exam Project on defaulted 401(k) loans is under way, Petit said, which EP hopes to have completed early next fiscal year. According to the final report, 60% of plans saw an increase in the number of defaulted loans from 2006 to 2008 and 47% of plans saw an increase in the number of outstanding loans from 2006 to 2008. There was a decrease in the number of loans originated during the same time period, indicating that older loans are not being timely repaid.

In addition, a “nonqualified” 401(k) EPCU project was prompted by the final report indicating that a number of 401(k) plans were showing up as “plans not intended to be qualified” based on Form 5500 filings. The EPCU found that 87% of plan sponsors in the sample made filing errors showing that their plan was not a qualified 401(k) plan and others marked their plan as a 401(k) plan when it was just a profit-sharing plan. The IRS reminds sponsors and practitioners to review the pension feature codes carefully before selecting and inserting them on the Form 5500 series return.

Recurring errors

Petit also noted some of the major 401(k) plan “recurring errors” that the IRS has identified:

• Non-amender/late amender issues, which Petit said was the “number one” exam issue;
• failure to follow the terms of the plan;
• issues involving nondiscrimination testing (ADP/ACP);
• noncompliance with 402(g) limits; and
• failure to timely deposit employee elective deferrals.

Source: Speech by Thomas Petit at on June 5, 2014 at the American Society of Pension Professionals & Actuaries (ASPPA) Regional Conference in Chicago.

Visit our News Library to read more news stories.