GAO Calls for Better Plan Compliance Studies

April 12, 2002 ( - Better targeting of noncompliance programs by the IRS could mean fewer headaches for plan sponsors, according to a new report by the General Accounting Office (GAO).

That was a key conclusion of a recent report by the General Accounting Office (GAO), which examined how IRS personnel surveyed defined contribution plans to find out how closely plans are sticking to laws and rules jointly enforced by the IRS and the Department of Labor.

In fact, the GAO says only 27 of the 73 study questions that IRS identified as compliance indicators conclusively demonstrated whether or not a plan was noncompliant. 

And a difference in approach could make a significant differece to plan sponsors.  The GAO reports that when the IRS made certain specified adjustments to supplement the analyses it had performed, the total number of compliance violations decreased.  In fact, as a result of these changes, IRS?s estimate of the percentage of 401(k) plans with one or more instances of noncompliance decreased from 56% to 44%.

The GAO notes that the IRS groups compliance violations into four categories:

  • Plan Document failure occurs when the language of the plan documents does not comply with provisions of the tax Code.
  • Operational failure occurs when the implementation and operation of a
    plan does not comply with provisions of the tax Code.
  • Demographic failure occurs when a plan fails to comply with
    fundamental nondiscrimination requirements faced by all tax-qualified
  • Employer Eligibility failure occurs when an employer that is not
    allowed to establish a section 401(k) plan, such as a state or local
    government, adopts such a plan.

“Compliance research studies could play an integral role in IRS’s efforts to ensure that tax-qualified pension plans adhere to applicable laws and rules,” GAO researchers wrote. “The more accurate the findings from compliance studies, the better able the IRS is to ensure that plans are operating in accordance with applicable requirements, so that participants receive the coverage and benefits to which they are entitled.”

To improve its research, the GAO recommended that the IRS:

  • pretest its study questionnaire to make sure the questions will elicit the kinds of answers the service needs. The GAO said fewer than half of the answers to IRS questions from earlier surveys proved the plan wasn’t in compliance,
  • better train its examiners to conduct the compliance studies. Although each IRS field office sent representatives to a kickoff conference for training for an earlier pension plan study, the GAO said the training never resulted in officials formulating questions that would distinguish compliance from noncompliance,
  • better maintain written or electronic documents to verify compliance study results

See the full GAO report .