News & Information



5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 02/22/12

Initial report on 401(k) questionnaire indicates widespread compliance with governing rules

The IRS has released an Interim Report summarizing results obtained from the 401(k) Compliance Check Questionnaire Project. The results indicate widespread compliance with the governing rules. The IRS, however, is encouraging plan sponsors to use the 401(k) Questionnaire, in conjunction with the report findings, to further strengthen their internal controls over plan operation and to find, fix and avoid errors in their 401(k) plans.

CCH Note: The 401(k) Questionnaire was sent to 1,200 401(k) plan sponsors in May 2010, requesting information on a variety of topics over the 2006-2008 periods. The overall response rate of the plans was 98 percent. The interim report reflects data from a representative sample of respondents that has been stratified based on plan size. The initial findings are highlighted below.

Employee contributions

A majority (54%) of 401(k) plans provide a one-year-of-service requirement before allowing participation in the plan. However, 31% feature a service requirement of 6 months or less. Nearly two-thirds (64%) of 401(k) plans contain an age-21 eligibility requirement before allowing participation in the plan. However, 20% of plans have no age requirements.

Nearly a fourth (22%) of 401(k) plans permit participants to make designated Roth contributions. Of these plans, 14% have initiated an eligible rollover distribution. Employers that did not offer the Roth option cited lack of employee interest (65%), administrative burdens (44%), complicated rules (26%), and expense (12%).

Employer contributions

Over two-thirds (68%) of plan sponsors provide matching contributions. Eighty-eight percent base matching contributions on a percentage of deferred compensation. Sixty-four percent do not condition the match on separate or additional service requirements. However, 22% of the plans require participants to be employed on the last day of the plan year in order to receive an allocation of matching contributions. Seventeen percent further require employees to be employed on the last day of the plan year and to complete a minimum number of hours of service.

Plan structure

Most plans (78%) include a cash or deferred arrangement as part of a profit-sharing plan. Nearly 2% of all CODAs are a feature of a money purchase pension plan (1.65%).

The overwhelming majority (86%) of 401(k) plans are pre-approved arrangements (e.g., master or prototype or volume submitter plans).

Nondiscrimination testing of elective deferrals

Most employers (60%) use current year data in determining the actual deferral percentage of nonhighly compensated employees. By contrast, 31% use prior year data.

The majority of 401(k) plan sponsors increasingly correct excess contributions within 2 1/2 months following the end of the year of the excess. Most employers correct excess deferrals by distributing the contributions and related earnings. The percentage of employers using this correction method increased from 61% in 2006 to 67% in 2008. By contrast, 17% relied on recharacterizing elective deferrals as employee after-tax contributions, compared to 23% in 2006 and 26% in 2007.

Nondiscrimination testing of matching contributions

Most plan administrators (69%) perform the ACP test using current year data for HCEs and NHCEs. Thirty-one percent use prior year data in performing the ACP test.

The vast majority (90% in 2008) of 401(k) plan sponsors correct nondiscrimination testing failures by distributing excess aggregate contributions. Most plan sponsors (76% in 2008) made the required corrective distribution within the specified 2 1/2 month period following the end of the year of the excess aggregate contribution. In addition, the majority of plan sponsors (83% in 2008) correct the excess aggregate contribution within 12 months.

Safe harbor plans

According to the report, 43% of 401(k) plans are safe harbor plans. Most safe harbor plans (49%) provide nonelective contributions. Thirty-seven percent of safe harbor plans provide for an enhanced match.

SIMPLE 401(k) plans

Only 5% of 401(k) plans are SIMPLE plans. Most SIMPLE plan sponsors (67%) make a 3% matching contribution. However, one-third make a 2% nonelective contribution.


The most common form of benefit in 401(k) plans is a lump-sum distribution, offered by 99% of plans. Installment payments (38%), qualified joint and survivor annuities (19%), and life annuities (11%) are other commonly offered distribution options.

Nearly three-quarters (72%) of 401(k) plans authorize involuntary cash-out distributions. Plans typically permit cash-outs based on different account balance thresholds. For example, 58% use a $1000 account balance as a trigger for cash-outs, while 38% use a threshold of $5,000. The report found that 62% of 401(k) plans allow in-service withdrawals and 79% permit direct rollover distributions.

Hardship withdrawals

About three quarters (76%) of 401(k) plans permit hardship distributions. Most hardship distributions are made for: the payment of medical expenses (98%), the purchase of a primary residence (93%), the payment of educational expenses (92%), prevention of foreclosure (94%), payment of funeral expenses (86%), and repairs to a residence (73%).

Participant loans

The report found that 65% of 401(k) plans allow participant loans. However, the terms by which loans are authorized and administered vary among the plans.

Loans are required to bear a reasonable rate of interest. However, a reasonable interest rate is not statutorily provided. Most plans (46%) use an interest rate of the prime rate plus one percent. Other pans use the prime rate plus two percent (19%), the prime rate (16%), or a local bank rate (11%).

Plan loans must generally be repaid within five years. An exception is provided for principal residence loans. The repayment period for principal residence loans varies considerably among the plans that authorize participant loans. While 23% require the loan to be repaid in five years, 22% allow 15 years for repayment, and 24% authorize 30 years for repayment.

Loan payments must be made at least quarterly under a level amortization schedule. Plans generally require loan repayments to be made every payroll period (81%). However, 11% allow for quarterly repayments and 5% allow for monthly repayments.

Most plans require the repayment of a loan through payroll deductions (93%). In the event an employee terminates employment, 27% of the plans treat the amount of an outstanding loan as a cash distribution or required immediate repayment upon termination of employment. However, 13% of plans allow a participant to continue loan repayments after a termination of employment.

Trust assets

401(k) plans may invest in nontraditional assets. However, only 1% of plans invest in the securities of the employer maintaining the plan. Similarly, only 1% of plans hold plan assets in foreign investments. The frequency with which participants are able to diversify the investments of their plan accounts varies among the plans. Plans typically, however, allow participants to sell employer securities on a daily basis.

EPCRS program

Sixty-five percent of 401(k) plan sponsors are aware of the Employee Plans Compliance Resolution System (EPCRS). However, only 6 percent of plan sponsors have used one or more of the EPCRS Programs, suggesting that most plans have implemented systems and procedures designed to facilitate compliance with the qualification requirements. Most plan sponsors that have used EPCRS (75%) used one of the standardized correction methods authorized by the IRS.

Determination letter program

The report found that 23% of plan sponsors have requested a determination letter from the IRS. However, 77% of the 401(k) plan sponsors have never participated in the determination letter program.

Customer education and outreach

According to the report, 57% of 401(k) plan sponsors use the IRS website to obtain information from the IRS. Fewer plan sponsors rely on the IRS toll-free number (13%), IRS Fix It Guides (7%), or telephone call to local IRS agents for information.

Plan administration

Most plans (93%) have implemented policies and procedures to allow for the self-audit of plan administration. Of these plans, 92 percent review their policies and procedures annually, while 3 percent conduct a review every two years.

Final report due later

A final report compiling data from the 401(k) Questionnaire will include comparisons by the plan size stratifications. These breakdowns will identify differences between small and large plans. The report is targeted for release in 2012.

Source: Section 401(k) Compliance Check Questionnaire Interim Report, February 2012, Internal Revenue Service, TE/GE Employee Plans, Employee Compliance Unit (EPCU).

For more information, visit

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.