Dresser & Associates

401(k) and the IRS

This is a quick FYI to employers who may be (un)fortunate enough to receive a letter from the IRS asking for voluntarily completion of an on-line questionnaire regarding their 401(k) plans. Approximately 1200 of these letters are going out from the IRS in the next few weeks.

Should your company receive such a ‘voluntary’ request, it may be best to have the questionnaire completed by an experienced/expert plan administrator who has a thorough understanding of plan administration and requirements. According to Audrey E. Mross, an attorney with Munck Carter in Dallas, when the IRS asked for a voluntary audit in 2008 of university executive pay and other income, 30 universities received visits from IRS auditors as a result.

401(k) plans are THE most popular retirement plans available today. Since their inception in 1987, businesses have moved from fixed benefit plans to these more flexible and portable retirement plans to benefit their employees. However, the rules governing 401(k) and its sister plan, 304(b), are complex and change almost as frequently as the weather.

Every year, participating companies should do a self audit of the plan to ensure compliance. At http://www.irs.gov/pub/irs-tege/pub4531.pdf a useful audit tool is available to help. Review the tool with a tax advisor to ensure understanding and answer the questions appropriately.

A few of the critical highpoints regarding 401(k) compliance:

  1. A separate trust fund must be established to manage all plan funds.
  2. Federal form 5500 must be filed annually.
  3. Discrimination tests should be performed at least annually to be sure the plan does not favor the higher paid employees.
  4. Hardship withdrawals must be in compliance with IRS rules.
  5. You must use an accurate, current record keeping system.
  6. The plan fiduciary must be considered to be acting in the sole interest of plan participants and therefore should not be in a situation where s/he may be considered compromised when it comes to plan decision making.

There are many 401(k) plan options and companies should review how best to build plans that fit the needs of their employee populations without burdening the business with administrative costs. Most importantly, don’t assume anything with regards to plans if you have an external fiduciary. The act of choosing a fiduciary is in itself a fiduciary responsibility and therefore obligates the company to take responsibility for a properly managed and functioning 401(k) plan.

At http://www.irs.gov/retirement/sponsor/article/0,,id=151923,00.html businesses interested in offering a qualified 401(k) program for their employees can find an excellent resource guide.

Contributed by:

Osborne Communications

Posted in Human Resources | Comments Off on 401(k) and the IRS

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