Pension Plans: IRS Programs for Resolving Deviations From Tax-Exemption
Requirements (Letter Report, 08/14/2000, GAO/GGD-00-169).

Pursuant to a congressional request, GAO reviewed the Internal Revenue
Service's (IRS) programs for resolving pension-plan deviations from
tax-exemption requirements, focusing on: (1) the frequency and types of
pension plan qualification failures that were detected and corrected
through IRS audits; (2) the frequency and types of pension plan
qualification failures that were identified by pension plan sponsors and
reported to IRS for approval of the correction; (3) the sanctions
established under IRS' audit program with the compliance fees that could
have been imposed if the same qualification failures had been
self-reported by the pension plans to IRS; and (4) whether any
cost-effective means, other than pension plan audits, have been
identified that would detect unreported qualification failures.

GAO noted that: (1) of all IRS fiscal year (FY) 1999 qualification
failure case closings, GAO's review showed that of 1,802 affected
pension plans: (a) 42 percent experienced plan document failures (i.e.,
the documents governing plan operations did not comply with tax law
requirements); (b) 66 percent experienced at least one operational
failure (i.e., the plan did not operate in accord with plan documents);
(c) less than 2 percent experienced demographic failures (i.e., the
plans had failed certain tests for ensuring that pension benefits were
provided in a nondiscriminatory manner); (d) 9 percent had both
operational and document failures; and (e) in general, all types and
sizes of plans were represented among those with qualification failures;
(2) of a random sample of FY 1999 closed audit cases, on average,
pension plan sponsors were assessed monetary sanctions that GAO
estimated were 10 times greater than the compliance fees that could have
been assessed if the plan sponsors had reported the qualification
failures to IRS for supervised correction; (3) however, there were
substantial differences in this ratio, depending on the type of
reporting program available to the plans and the manner in which IRS
applied its guidelines for assessing audit sanctions; (4) IRS officials
said that, because of concerns expressed by pension groups, they had
initiatives under way to ensure consistency among amounts assessed
within compliance programs and coordination across compliance programs;
(5) the pension experts GAO talked with at IRS and outside of the
government generally viewed audits as an integral part of the
government's efforts to promote voluntary compliance and preserve
pension benefits for the U.S. workforce; and (6) while they did not
identify any cost-effective alternatives to replace IRS audits, both IRS
and the pension experts thought that enhancements could be made to
existing IRS programs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-169
     TITLE:  Pension Plans: IRS Programs for Resolving Deviations From
	     Tax-Exemption Requirements
      DATE:  08/14/2000
   SUBJECT:  Tax exempt status
	     Pensions
	     Tax law
	     Tax return audits
	     Reporting requirements
	     Sanctions
	     Cost effectiveness analysis
	     Voluntary compliance
IDENTIFIER:  IRS Walk-In Closing Agreement Program
	     IRS Voluntary Compliance Resolution Program

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GAO/GGD-00-169

PENSION PLANS IRS Programs for Resolving Deviations From Tax- Exemption
Requirements

United States General Accounting Office

GAO Report to the Chairman, Subcommittee on Oversight, Committee on Ways and

Means, House of Representatives

August 2000 GAO/ GGD- 00- 169

United States General Accounting Office General Government Division
Washington, D. C. 20548

Page 1 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

B- 282750 August 14, 2000 The Honorable Amo Houghton Chairman, Subcommittee
on Oversight Committee on Ways and Means House of Representatives

Dear Mr. Chairman: By extending tax- exempt status to qualified pension
plans, the nation's tax laws have been used both to promote the
establishment of employersponsored pension plans and to regulate those
plans. Internal Revenue Service (IRS) records for the most recently
available year indicated that in 1997, there were about 965,000 private,
employer- sponsored, tax- qualified pension plans. These plans had about 127
million participants and had amassed assets totaling about $3.6 trillion.

Maintaining these plans over time and protecting their assets are generally
recognized as critical to the economic well- being of the U. S. workforce
during retirement. Thus, for plans that might be at risk of losing their
taxexempt status because of deviations from tax code requirements, IRS has
developed two programs to encourage plan sponsors to (1) detect and correct
such deviations, (2) report those corrections to IRS for approval, and (3)
pay a compliance fee as assessed by IRS. 1 Alternatively, if IRS finds the
deviations in audits, it could revoke the plan's tax- exempt status- a
severe penalty that may fall most heavily on those who are not responsible
for the noncompliance, the covered employees.

As you requested, this report describes the extent of significant pension
plan deviations from tax- exemption qualification requirements (hereafter
referred to as qualification failures) and the incentives established for
plan sponsors to report such failures to IRS. 2 Specifically, the objectives
of this review were to

1 In general, plan sponsors that detect and correct insignificant deviations
or quickly correct significant deviations (i. e., within specified
correction periods) may do so without reporting the corrections to IRS for
approval and without paying a compliance fee provided the correction does
not involve amending plan documents.

2 The term significant refers to qualification failures that, under IRS
procedures, are determined to be serious enough to threaten a plan's tax-
exempt status and thus constitute a defect warranting IRS supervision of the
correction and assessment of a monetary sanction through an agreement
negotiated

B- 282750 Page 2 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

ï¿½ identify the frequency and types of pension plan qualification failures
detected and corrected through IRS audits and those identified by pension
plan sponsors and reported to IRS for approval of the correction;

ï¿½ compare the sanctions established under IRS' audit program with the
compliance fees that could have been imposed if the same qualification
failures had been self- reported by the pension plans to IRS; and

ï¿½ determine whether any cost- effective means, other than pension plan
audits, have been identified that would detect unreported qualification
failures.

As agreed with the Committee, we analyzed the frequency and types of
qualification failures by plan size and plan type, such as defined benefit
or defined contribution plans. 3

To carry out this work, we reviewed the qualification failure cases closed
by IRS in fiscal year 1999 covering 1,802 pension plans. These cases
resulted from IRS audits of plans and the two pension plan self- reporting
programs established by IRS, the Walk- In Closing Agreement Program
(referred to in this report as the Walk- In Program) and the Voluntary
Compliance Resolution (VCR) Program. Also, for a random sample of the audit
cases, we determined the range of compliance fees that the plan sponsors
could have paid if the plan sponsor had corrected the failures and reported
them to IRS for approval. We did our work between May 1999 and May 2000 in
accordance with generally accepted government auditing standards. 4

Our review of all IRS fiscal year 1999 qualification failure case closings
showed that of the 1,802 affected pension plans,

ï¿½ 42 percent experienced plan document failures (i. e., the documents
governing plan operations did not comply with tax law requirements);

ï¿½ 66 percent experienced at least one operational failure (i. e., the plan
did not operate in accord with plan documents);

to conclude an IRS audit or assessment of a compliance fee through IRS'
pension plan self- reporting programs.

3 In general, a defined benefit plan is one that specifies the benefits or
the method of determining benefits payable by the plan, such as the
percentage of employee compensation payable to an employee upon qualifying
for retirement under the terms of the plan. A defined contribution plan is
one that specifies the contributions that are to be made to the plan. The
benefit payable on retirement would be dependent on the amounts of
contributions made and the earnings on those contributions.

4 See appendix I for a more detailed description of the assignment's scope
and methodology, including a description of the work done to discuss
alternatives to audit with IRS National Office officials and representatives
of organizations involved in pension law, accounting, and pension
operations. Results in Brief

B- 282750 Page 3 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

ï¿½ less than 2 percent experienced demographic failures (i. e., the plans had
failed certain tests for ensuring that pension benefits were provided in a
nondiscriminatory manner);

ï¿½ 9 percent had both operational and document failures; and

ï¿½ in general, all types and sizes of plans were represented among those with
qualification failures.

Our review of a random sample of fiscal year 1999 closed audit cases showed
that, on average, pension plan sponsors were assessed monetary sanctions
that we estimated were 10 times 5 greater than the compliance fees that
could have been assessed if the plan sponsors had reported the qualification
failures to IRS for supervised correction. However, there were substantial
differences in this ratio, depending on the type of reporting program
available to the plans and the manner in which IRS applied its guidelines
for assessing audit sanctions. IRS officials said that, because of concerns
expressed by pension groups, they had initiatives under way (e. g.,
establishing new positions for reviewing qualification failure settlements)
to ensure consistency among amounts assessed within compliance programs and
coordination across compliance programs.

The pension experts we talked with at IRS and outside of the government
generally viewed audits as an integral part of the government's efforts to
promote voluntary compliance and preserve pension benefits for the U. S.
workforce. While they did not identify any cost- effective alternatives to
replace IRS audits, both IRS and the pension experts thought that
enhancements could be made to existing IRS programs.

In commenting on a draft of this report, the Commissioner of Internal
Revenue generally agreed that the report fairly and accurately described the
correction of qualification failures covered by the scope of our review (i.
e., the correction of deviations from qualification requirements that
warranted IRS involvement).

To qualify for tax- exempt status, pension plans must comply with an array
of legal requirements specified in the Internal Revenue Code. 6 For example,
plan sponsors are required to establish and maintain an updated, legally
compliant, written pension plan document that is communicated to

5 95- percent confidence interval: 4 to 15 times. 6 Section 401( a)
addresses qualification requirements for pension, profit- sharing, and stock
bonus plans. We use the term “pension plan” in this report to
refer to all types of retirement plans that are subject to 401( a). Section
403 addresses requirements for annuity plans; however, we limited the scope
of our review to section 401( a) pension plans and IRS programs that deal
with these types of plans. Background

B- 282750 Page 4 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

employees and describes the specific terms and benefits provided under the
plan. 7 Failure to maintain compliance with qualification requirements may
ultimately lead to revocation of a plan's qualified status, including the
loss of tax benefits, 8 which could potentially harm innocent pension plan
participants.

No data exist on the qualification failure rate among the total population
of defined benefit and defined contribution plans. However, IRS has
completed some research into pension plan compliance issues that provided
some data for certain plan types. From these data, which IRS developed by
auditing random samples of 3 relatively common types of defined contribution
plans, we estimated that less than 2 percent of the 529,000 plans 9
represented by the samples had experienced qualification failures in the
mid- 1990s (see app. II). Our estimate is based on audit closing codes that
show the audit identified deviations from tax- exemption requirements that
IRS considered significant enough to warrant obtaining a written agreement
with the plans for correcting the failures and paying a monetary sanction.

The research data, however, were not sufficient to provide insights into the
prevalence of qualification failures among the total population of pension
plans nor to provide insights into the various types of failures experienced
by the covered plans.

To enhance compliance with pension law requirements and help plan sponsors
avoid revocation of their plans' tax- exempt status, IRS administratively
introduced several compliance initiatives during the 1990s. Two of the
initiatives, the VCR and Walk- In Programs, depend on pension plans to self-
report qualification failures to IRS. 10 A third initiative involved IRS
modifying its audit procedures to provide a standardized means for reaching
agreements with pension plans to correct qualification

7 Treasury Regulation section 1. 401- 1( a)( 2). 8 The tax benefits of
maintaining a qualified plan are the (1) tax deductibility of the employer's
contributions to the plan, (2) deferred taxation for the participants on the
contributions made by the employer on their behalf, and (3) deferred
taxation on the participants' earnings accrued in the related exempt trust.
See sections 402, 404, and 501( a), respectively.

9 95- percent confidence interval: 1. 1 to 2.3 percent. This confidence
interval was computed to include the cases with unknown qualification
failure status, as shown in table II. 1. 10 In addition, under the procedure
establishing the pension plan self- reporting programs, plan sponsors that
detect and correct insignificant deviations or quickly correct significant
deviations (i. e., within specified correction periods) may do so without
reporting the corrections to IRS for approval and without paying a
compliance fee provided that the correction does not involve amending plan
documents.

B- 282750 Page 5 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

failures identified during audits of plan operations, thus avoiding
revocation of tax- exempt status.

IRS distinguishes among three principal types of plan qualification
failures:

ï¿½ A document failure occurs when a written plan provision, or its absence,
violates the provisions of the law related to maintaining a qualified
pension plan;

ï¿½ An operational failure occurs when a plan sponsor fails to follow
provisions of the plan document in operating the plan; and

ï¿½ A demographic failure occurs when a plan sponsor does not comply with
specific provisions of pension law 11 intended to ensure that a plan does
not discriminate in providing benefits and offering participation to
employees.

Table 1 summarizes the types of qualification failures covered by the
compliance programs, the correction methods authorized, and the nature of
the compliance fee.

Program Purpose Eligible qualification failure Authorized correction
Compliance fee or

sanction VCR Allow plan sponsor to self- report

selected qualification failures Operational a ï¿½Correction limited to
conforming plan operations to plan document provisions,

plan amendments not permitted

ï¿½Written document specifying the corrective action must be approved by IRS b

Published fee schedule based on plan asset amount and number of plan
participants

Walk- in Allow plan sponsor to self- report any qualification failures
Operational,

document, demographic

ï¿½Correction by conforming plan operations to plan document provisions and/
or amending plan documents

ï¿½Written document specifying the corrective action must be approved by IRS

Fee negotiated with IRS, using graduated fee ranges based on number of plan
participants with the lowest amount set equal to the VCR fee

Audit Allow plan sponsor to correct failures IRS identifies during audits,
i. e., examinations of plans' operational adherence to plan documents and
plan document conformance to legal requirements

Operational, document, demographic

ï¿½Correction by conforming plan operations to plan document provisions and/
or amending plan documents

ï¿½Written document specifying the corrective action must be approved by IRS

Fee negotiated with IRS, based on nature, extent, and severity of failures

a VCR is not available for egregious operational failures, such as
consistent and repeated failure to follow terms of the plan document. b
Under the VCR Program, a limited number of operational failures may be
corrected using the

Standardized VCR Procedure (SVP). For SVP qualified cases, a comparatively
small compliance fee

11 A demographic failure is a violation of either Internal Revenue Code
section 401( a)( 4), 401( a)( 26), or 410( b) that is not an operational
failure.

Table 1: IRS' Pension Plan Compliance Programs for Supervising the
Correction of Qualification Failures

B- 282750 Page 6 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

(i. e., $350) is available- regardless of number of participants or trust
asset amount- to plan sponsors who agree to use correction methods specified
in IRS published guidance.

Source: GAO review of IRS procedures.

As shown in table 2, 1,802 pension plans (about 0.2 percent of all types and
sizes of plans) had agreements for correcting qualification failures
approved by IRS in fiscal year 1999. About 80 percent of the plans
selfidentified the failures and used IRS' reporting programs to obtain
approval for the corrections. The remainder entered into agreements to
correct their failures as a result of an IRS audit.

Plans with qualification failure correction agreements

Plan size and type IRS audit Walk- In Program VCR

Program Total Population of plans

having filed recent annual reports

with IRS Percent of plans

with correction agreements Plan size (number of participants)

Less than 10 192 339 108 639 568,953 0.11 11 to 50 77 132 196 405 213,579
0.19 51 to 100 28 51 83 162 53,522 0.30 101 to 300 43 57 130 230 41,859 0.55
301 to 1,000 13 38 98 149 18,591 0.80 1,001 to 10, 000 11 13 126 150 10,451
1.44 More than 10,000 2 1 37 40 1,449 2.76 Missing data 0 23 4 27 56,565
0.05

Total 366 654 782 1,802 964,969 0.19 Plan type

Defined Benefit 42 125 102 269 77,797 0.35 Defined Contribution Profit
Sharing 228 347 577 1,152 619,797 0.19 Money Purchase 84 102 62 248 179,633
0.14 Stock Bonus a 5 21 20 46 4,473 1.03 Other 6 23 13 42 5,619 0.75
Subtotal 323 493 672 1,488 809,522 0.18 Missing data or unknown 1 36 8 45
77,650 0.06

Total 366 654 782 1,802 964,969 0.19

Note: Data on the total population of plans are based on IRS records of Form
5500 series annual reports filed by pension plans for 1997, the most recent
year available. a A stock bonus plan is established and maintained by an
employer to provide employees or their

beneficiaries with benefits that are distributable in stock of the employer.
Source: GAO review of IRS' qualification failure closing agreements and IRS'
employee plans database as of May 2000.

1,802 Agreements to Correct Qualification Failures Approved in 1999

Table 2: Pension Plans With IRS- Approved Agreements for Correcting
Qualification Failures in Fiscal Year 1999

B- 282750 Page 7 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Our review of the fiscal year 1999 agreements between IRS and the 1,802
pension plans for correcting the qualification failures showed the
following:

ï¿½ 42 percent of the plans experienced plan document failures (i. e., plan
documents did not comply with tax law requirements). Most of these plans
(559 of the 762 plans) had not been amended to reflect changes in pension
law but were not otherwise determined to be noncompliant. The remainder had
some combination of document, operational, and demographic problems, no
single aspect of which predominated;

ï¿½ 66 percent of the plans experienced at least one operational failure (i.
e., the plan did not operate in accord with plan documents) and generally
averaged an estimated two failures. 12 The operational failures cut across
all categories of pension requirements, such as those covering employee
participation in pension plans and employee vesting in employer- funded
contributions and benefits. Some failures occurred more frequently than
others, but no single type was experienced by a majority of pension plans;

ï¿½ Less than 2 percent of the plans experienced demographic failures (i. e.,
the plans had failed certain tests for ensuring that pension benefits were
provided in a nondiscriminatory manner); and

ï¿½ 9 percent had both operational and document failures. In general, all
types and sizes of pension plans experienced qualification failures.
Appendix III contains a technical description of these qualification
failures. The appendix provides a detailed listing of the document,
operational, and demographic failures referenced to the tax code section
violated; the type and size of the plans that committed the failures; and
whether the failures were identified in an IRS audit or selfreported by the
plans.

Regarding IRS' use of sanctions and compliance fees as an incentive for
plans to identify and report qualification failures to IRS for supervised
correction, our analyses of a random sample of IRS fiscal year 1999 audit
cases showed that, on average, plan sponsors were assessed audit sanctions
that we estimate were between 4 and 15 times more per plan participant than
could have been assessed had the failures been reported to IRS. 13

12 95- percent confidence interval: 2. 1 to 2.3 failures. 13 We made our
comparison based on the cost per plan participant, rather than cost per
plan, in order to standardize the comparison among plans. For example, a $3,
000 audit penalty may have greater significance to a small plan having 3
participants (i. e., a cost of $1, 000 per participant) than to a large plan
having 3,000 participants (i. e., a cost of $1 per participant). Audit
Sanctions

Generally Exceeded Compliance Fees That Could Have Been Assessed

B- 282750 Page 8 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Several factors contributed to the variation in the audit sanction-
tocompliance fee ratio. In part, the type of self- reporting program
available to the plans affected the ratio. Our analyses showed the following
results:

ï¿½ Plans that were eligible to use the VCR Program 14 could have avoided
audit sanctions that we estimate were about 13 times 15 greater than the
applicable VCR fee.

ï¿½ Plans that were eligible to use the Walk- In Program 16 could have avoided
audit sanctions that we estimate were about 30 percent 17 greater than the
applicable Walk- In fees.

In general, as shown in table 3, the fee schedule of the VCR Program
provided for assessing lower fees than the range of Walk- In fees. And,
within plan size categories, the Walk- In Program fee schedule provided for
higher fees for correcting more serious violations.

VCR fee for plan with assets a Number of participants Less than

$500,000 $500,000 or more

Walk- In fee range b Audit sanction

10 or fewer $500 $1,250 VCR fee – $4,000 11– 50 500 1,250 VCR
fee – $8,000 51– 100 500 1,250 VCR fee –$ 12,000
101– 300 500 1,250 VCR fee –$ 16,000 301– 1, 000 500 1,250
VCR fee –$ 30,000 1,001– 9,999 5,000 5,000 VCR fee –$
70,000

10,000 or more 10,000 10,000 VCR fee –$ 70,000 The sanction is to be a

negotiated percentage of the Maximum Payment Amount. c The sanction is not
to be excessive and is to bear a reasonable relationship to the nature,
extent, and severity of the failures. a For plans eligible to use the SVP
component of the VCR Program, the fee would be $350 regardless

of plan size. A total of 234 of the 1, 802 plans with IRS- approved
agreements to correct qualification failures in fiscal year 1999 qualified
for SVP. b The Walk- In fee ranges from a minimum amount equal to the VCR
fee to the specified maximum.

The mid- point of this range is the approximate starting point for the
penalty assessment. More serious violations are to be assessed more and less
serious violations less. c Maximum Payment Amount is the approximation of
the total tax that IRS could collect upon plan

disqualification. Source: IRS Revenue Procedure 98- 22.

14 A reporting program designed to correct certain operational qualification
failures. 15 95- percent confidence interval: 9. 9 to 16. 1 times. 16 A
reporting program designed to correct document, operational, and demographic
qualification failures. Unlike the VCR Program, the Walk- In Program
authorizes failures to be corrected through plan amendment.

17 95- percent confidence interval: 20 to 40 percent.

Table 3: IRS Qualification Failure Sanction Guidelines

B- 282750 Page 9 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

In addition, the fee structure within both programs set much higher fees for
small plans than large plans when compared on a per- plan- participant basis
(see table 4). For example, the sponsor of the smallest plan (a
oneparticipant plan) could be subject to a Walk- In compliance fee as large
as $4,000 per participant, while the sponsor of a plan with 10,000
participants would, at maximum, face a per- participant fee of $7.

Per- participant fee Number of participants Minimum a Maximum

1– 10 $50.00 $4,000.00 11– 50 10.00 727.27 51– 100 5.00
235.29 101– 300 1.67 158.42 301– 1, 000 0.50 99.67 1,001–
9,999 0.50 69.93 10,000 or more b 7.00 a Excludes the SVP portion of the VCR
Program, which is limited to certain operational failures.

Because the fee is $350 regardless of plan size, qualifying plans could see
minimum per participant fees ranging from about $35. 00 for the smallest
plans to less than $0.04 for the largest plans. b Less than $1, depending on
size of the plan.

Source: GAO analyses of IRS compliance fee guidelines.

Our analysis of the fiscal year 1999 audit cases showed that sponsors of
plans with qualification failures that must be corrected by amending plan
documents (e. g., those eligible for the Walk- In, but not the VCR, Program)
would likely have been assessed fees that were greater than the fees for the
VCR eligible plans- an estimated average of about $1,167 per participant 18
compared with about $68 per participant. 19

The amount of the audit sanction is another factor that affects the
sanction- to- compliance fee ratio. IRS' guidelines for setting audit
sanctions specify that they should be reasonable and the product of
negotiations with the plan sponsors. Our analyses of the sample data showed
that in applying the guidelines, IRS assessed audit sanctions in four cases
that were less than the lowest applicable reporting program compliance fee
and in four instances more than 50 times the lowest applicable compliance
fee.

Determining the causes for the variations in the audit sanction-
tocompliance fee ratios was outside the scope of our review. However, IRS

18 95- percent confidence interval: $1, 021 to $1, 313. 19 95- percent
confidence interval: $42 to $94.

Table 4: Minimum and Maximum Compliance Fees for Self- Reporting Plans

B- 282750 Page 10 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

National Office officials said that, given concerns previously expressed by
pension groups, several initiatives were already under way to ensure
consistency among amounts within the compliance programs and coordination of
the amounts across programs. For example, in each office responsible for
settling qualification failures, IRS is establishing new positions
responsible for reviewing qualification failure settlements to ensure
consistency within and coordination across compliance programs. 20

The National Office officials also said that, in general, audit sanctions
should be higher than the self- correction compliance fees and that the
compliance fees for correcting qualification failures through plan amendment
should be higher than the fees for correcting failures that do not involve
amending plan documents. The higher audit sanctions were seen as a part of
an incentive system promoting self- correction. Higher compliance fees were
set for plan amendments because IRS views the plan documents as sacrosanct.
As required by pension law, the documents set out the employers'
commitments. And, in turn, employees depend on the employers meeting those
pension commitments.

According to IRS, the primary objective of its pension plan examination
program is regulatory, focusing on the continued tax qualification of the
examined plans. Under IRS policy, the plans are to be audited to determine
whether the plans' operations meet the applicable qualification requirements
(i. e., plans operate in accord with plan documents, and plan documents
conform to legal requirements). In fiscal year 1999, IRS audited about
14,000 returns filed by pension plans.

IRS pension audits were generally viewed by IRS and the pension experts we
talked with, as an integral part of the government's efforts to promote
voluntary compliance and to preserve pension benefits for the U. S.
workforce. (App. I lists the pension practitioners, organizations
representing the views of plan sponsors and participants, and other experts
contacted.) For example, pension practitioners advised us that, given the
complexity of pension law, it is relatively easy for a business sponsor of a
plan to inadvertently do something that would constitute a qualification
failure. Once the practitioner advising the plan is aware of

20 As part of the IRS- wide reorganization mandated by the IRS Restructuring
and Reform Act of 1998 (P. L. 105- 206), IRS established a new functional
unit to administer pension tax law. The new organization, managed by the
Director, Employee Plans, was established with three operational components:
Employee Plans Customer Education and Outreach; Employee Plans Rulings and
Agreements; and Employee Plans Examination. This part of the reorganization
became effective in December 1999. Experts View Audits as

an Integral Part of IRS' Compliance Program

B- 282750 Page 11 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

such an apparent failure, the practitioner is responsible for providing the
plan sponsor with advice on correcting the failure.

According to the practitioners, such advice would include identifying (1)
possible corrective action options and the associated cost of making such
corrections, (2) fees charged by IRS for approving the correction of such
failures, and (3) audit sanctions that could be assessed by IRS if the plan
sponsor did not submit the correction to IRS for approval or if the sponsor
did not make the appropriate correction. Pension sponsors would then make a
business decision on how to proceed (e. g., type and timing of the
correction) based on available funds, correction costs, compliance fees, and
the risk of audit and audit sanctions.

While neither IRS nor the pension experts that we spoke with identified
cost- effective alternatives to replace IRS audits, they indicated that
enhancements could be made to the existing compliance system. IRS tended to
focus on reducing the burden on compliant plans, for example, by improving
the audit selection process. In general, the pension experts identified
changes that IRS could make that would promote voluntary compliance, thus
reducing the need for audits or oversight of qualification failure
correction. These included publishing information to help plans comply with
pension requirements (e. g., a self- audit guide and the results of IRS
compliance studies) and extending the provision for unsupervised and
unpenalized correction of deviations from pension requirements to include
allowing plan amendments under certain conditions.

Some pension experts differed on the appropriate role of IRS in supervising
the correction of qualification failures that, under existing procedures,
warrant reporting to IRS. Currently, plan sponsors may correct a failure,
but if they do not report it to IRS and receive approval of the correction,
they may be liable for a penalty if, during a subsequent audit, IRS detects
the failure that already had been retroactively corrected by the plan
sponsor. Some experts thought that if a plan sponsor corrected a failure and
did not see a need for the certainty of an IRS opinion approving the
correction, then the plan should only be penalized if the correction was
subsequently determined by IRS to be inappropriate. Another expert indicated
that his clients liked the certainty of closure that the existing self-
reporting programs offered.

In discussing possible program changes with us, IRS officials said that
their compliance programs are not a static system. Since 1992, when a
selfreporting program was first introduced, IRS has made several significant
changes. Moreover, IRS officials expect their compliance programs to be

B- 282750 Page 12 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

further revised as IRS gains experience and input from the pension
community. They said that they are taking the views expressed by plan
sponsors and practitioners, such as those discussed above, into
consideration as they consider enhancements to their programs. They also
pointed out that in the IRS reorganization currently under way, a new office
of employee plan outreach has been established. This group is tasked with
getting better information out to pension plans.

In commenting on a draft of this report, the Commissioner of Internal
Revenue generally agreed that the report fairly and accurately described the
correction of qualification failures covered by the scope of our review (i.
e., the correction of deviations from qualification requirements that
warranted IRS involvement). The Commissioner also emphasized that, as we
indicated in footnote 1, plan sponsors that detect and correct insignificant
deviations from qualification requirements or quickly correct certain types
of significant deviations may do so without IRS involvement. During our
review, data were not available from IRS to estimate how frequently plan
sponsors took such actions. Thus, this report does not contain data on the
extent to which plan sponsors have corrected insignificant deviations from
qualification requirements or quickly corrected certain types of significant
deviations. In his comments, the Commissioner also described some additional
organizational changes being made to promote consistency and coordination
among IRS compliance actions. The full text of the Commissioner's comments
is reprinted in appendix IV.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this letter. At that time, we will send copies to Representative
William J. Coyne, Ranking Minority Member, Subcommittee on Oversight, House
Committee on Ways and Means; the Honorable Charles O. Rossotti, Commissioner
of Internal Revenue; other interested congressional committees; and other
interested parties. We will also make copies available on request. Agency
Comments

B- 282750 Page 13 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Key contributors to this report are acknowledged in appendix V. If you have
any questions, you may contact me or Thomas Richards on (202) 5129110.

Sincerely yours, Cornelia M. Ashby Associate Director, Tax Policy

and Administration Issues

Page 14 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Contents 1 Letter 16 Objectives, Scope, and Methodology 16 Appendix I
Objectives, Scope, and

Methodology 20 Appendix II Results of IRS Compliance Research

21 Appendix III Results of Our Analyses of Pension Plan Qualification
Failures Resolved in Fiscal Year 1999

27 Appendix IV Comments From the Internal Revenue Service

29 Appendix V GAO Contacts and Staff Acknowledgments

Table 1: IRS' Pension Plan Compliance Programs for Supervising the
Correction of Qualification Failures

5 Table 2: Pension Plans With IRS- Approved Agreements

for Correcting Qualification Failures in Fiscal Year 1999

6 Tables

Table 3: IRS Qualification Failure Sanction Guidelines 8

Contents Page 15 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Table 4: Minimum and Maximum Compliance Fees for Self- Reporting Plans

9 Table II. 1: Qualification Failures Among Certain Types of

Pension Plans 20

Table III. 1: Qualification Failures Identified in IRS Audits and Self-
Reported by Pension Plans

21 Table III. 2: Qualification Failures by Plan Type 23 Table III. 3:
Qualification Failures by Plan Size 25

Abbreviations

IRS Internal Revenue Service SVP Standardized VCR Procedure VCR Voluntary
Compliance Resolution

Appendix I Objectives, Scope, and Methodology

Page 16 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Our objectives were to (1) identify the frequency and types of pension plan
qualification failures detected and corrected through IRS audits and those
identified by pension plan sponsors and reported to IRS for approval of the
correction; (2) compare the sanctions established under IRS' audit program
with the compliance fees that could have been imposed if the same
qualification failures had been self- reported by the pension plans to IRS;
and (3) determine whether any cost- effective means, other than pension plan
audits, have been identified to detect unreported qualification failures.

As agreed with the Committee, we analyzed the frequency and types of
qualification failures by plan size and plan type, such as defined benefit
or defined contribution plans.

To identify the frequency and types of pension plan qualification failures
detected and corrected through IRS audits and those that pension plans self-
reported to IRS for approval of the correction, we did the following:

ï¿½ Reviewed available IRS research data on pension plan compliance with tax-
exemption requirements and used these data to estimate the prevalence of
pension plan deviations from tax- exemption requirements that would warrant
being reported to IRS as qualification failures under the Voluntary
Compliance Resolution (VCR) or Walk- In Programs;

ï¿½ Visited the four IRS district offices responsible for coordinating the
audit and Walk- In programs 1 to identify all cases closed under these
programs during fiscal year 1999; 2

ï¿½ Identified all 366 audit cases and all 654 Walk- In cases with IRS
approved agreements with pension plans for correcting qualification
failures. We obtained the closing agreement for each case to determine the
specific nature of the qualification failures identified. We collected data
on the type of qualified plan and the number of plan participants from the
form 5500 (the annual report filed by the pension plan) in the case file. If
a form 5500 was not available from the case file, we obtained data on the
type of plan and the number of participants from databases in the IRS
district offices or National Office;

1 During fiscal year 1999, IRS administered the audit and Walk- In programs
through its four key district offices. IRS also closed a small number of
qualification failure cases through agreements done in conjunction with the
determination letter process. Those agreements were outside the scope of
this review.

2 We defined a “case” as being the equivalent of the results of
an audit of one pension plan per employer. In situations where district
offices combined the audit results for multiple pension plans of a single
employer into one closing agreement, we considered each plan as a separate
case. Objectives, Scope, and

Methodology Frequency and Type of Qualification Failures

Appendix I Objectives, Scope, and Methodology

Page 17 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

ï¿½ Collected similar data for all 782 VCR cases from files located in IRS
national headquarters. Of the 782 total cases, 234 qualified for the
Standardized VCR Procedure (SVP). We also obtained an IRS database that
contained, among other data items, some limited information on the type of
qualification failures found in VCR cases;

ï¿½ Developed a classification methodology for cataloging the issues found in
the audit, Walk- In, and VCR cases. We did this by reviewing pension law and
regulations, by reviewing existing IRS classification issue methodologies,
and by reviewing the language in the agreements closing these cases. We
provided IRS pension program officials with a copy of our classification
methodology for review and comment;

ï¿½ Classified the issues found in all the audit and Walk- In cases that we
identified as being closed in fiscal year 1999. Our classification of the
qualification failures in each case relied on the description of each
failure found in the closing agreement for the case. When the description of
the failure included an explicit tax code citation, we classified the
failure according to that citation. If specific code sections were not
cited, we used our judgment in assigning failures to specific categories
based on the language contained in the agreement; and

ï¿½ Classified the issues found in VCR cases closed in fiscal year 1999. For
VCR cases that did not qualify for SVP, we classified a random sample of 310
of 548 total cases. For these cases, our classification methodology was the
same as for the audit and Walk- In cases. We then weighted the results from
the random sample to obtain an estimate of the types of qualification
failures reported in the 548 cases. For cases that qualified for SVP, we
relied on issue classifications found in the IRS database of all VCR cases.
This database contained issue codes for the limited types of failures that
qualify under SVP. 3 The estimates of the types of qualification failures
shown in the tables in appendix II for the VCR program as a whole combine
the results from the classification of the random sample of cases, weighted
to represent the population of all non- SVP cases, with the classifications
for all SVP cases.

From the above, we calculated statistics on the types of qualification
failures found in the cases by IRS program, plan size, and plan type. We did
not review the quality of the audit, Walk- In, or VCR casework done by IRS.
Nor did we make a reliability assessment of the IRS research data sets.

3 Before using the database, we tested the accuracy of a random sample of
entries by tracing the cases back to source documents.

Appendix I Objectives, Scope, and Methodology

Page 18 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

To compare the sanctions assessed by IRS for qualification failures detected
through audit with the compliance fees that could have been assessed if the
same qualification failures had been self- reported by the pension plans to
IRS for approval of correction, we did the following:

ï¿½ Reviewed IRS policies and procedures for resolving pension plan
qualification failures identified through IRS' audit, Walk- In, and VCR
programs as well as the guidance on determining the monetary sanctions
associated with each of these programs. We also discussed key district
office procedures for administering both the audit and Walk- In programs and
discussed qualification issues with each of the four key district office's
closing agreement coordinators as well as officials from IRS who
administered the VCR Program;

ï¿½ Reviewed the 366 audit cases closed during fiscal year 1999 by the four
key district offices to determine the specific nature of the qualification
failures and the amount of the sanction imposed by IRS on the plan as a
result of the audit;

ï¿½ Organized the 366 cases into groupings that would enable us to sample the
cases in a manner that ensured representative coverage by location and
general type of the failure. First, we divided the 366 cases into 4 groups,
depending on which of the 4 key district offices had conducted the audit. We
then divided each of the four groups into two subgroups, for a total of
eight strata, based on whether the case involved qualification failures
related solely to the failure to amend the plan document in a timely manner
in conjunction with tax law changes or other failures in addition to or
other than plan amendment;

ï¿½ Selected a random sample of cases from each of the eight strata for
analysis to estimate, using IRS guidelines, the likely applicable Walk- In
or VCR program compliance fee that would have been imposed if the sampled
plan had availed itself of one of the self- reporting programs;

ï¿½ Provided IRS program officials with our Walk- In and VCR compliance fee
estimates for their review and concurrence; and

ï¿½ Weighted each sample element to account statistically for all the members
of the population, developed estimates of the mean per- participant audit
sanction and likely Walk- In and VCR compliance fees, and computed ratios
comparing actual audit sanctions to likely Walk- In and VCR Program
compliance fees.

To ascertain whether any cost- effective means, other than pension plan
audits, have been identified to detect unreported qualification failures, we
held discussions with IRS officials, pension practitioners, and other
pension interest groups. More specifically, we solicited the views of IRS
headquarters officials responsible for managing audits of pension plans,
Comparison of Sanctions

for Failures Detected Through Audit and SelfReported by the Plans

Alternatives to Audit as a Means to Detect Qualification Failures

Appendix I Objectives, Scope, and Methodology

Page 19 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

managing pension plan voluntary compliance programs, and conducting pension
plan compliance research. To obtain the perspectives of pension
practitioners, we contacted representatives of the American Bar Association,
American Institute of Certified Public Accountants, American Society of
Pension Actuaries, and Tax Executives Institute. To obtain the perspective
of pension plan sponsors, we contacted the Association of Private Pension
and the Welfare Benefit Plans and Employee Retirement Income Security Act
Industry Committee. For plan participant viewpoints, we contacted the
Pension Rights Center and the American Association of Retired Persons
Foundation. For additional views, we contacted the Pension Research Council
and the Employee Benefits Research Institute. Not all the groups that we
contacted offered opinions on alternatives to audit.

Appendix II Results of IRS Compliance Research

Page 20 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Qualification failure status Type of plan and plan characteristics Total

No qualification

failures Correctable

qualification failures a

Uncorrectable qualification failures

(revocations) Unknown Total Profit- sharing plans b

Number of plans 285,000 99.0% 0.8% 0 0.2% 100%

Number of participants 12,178,000 88.6 11.4 0 c 100

Amount of assets (billions) $320.0 97.5 2.5 0 c 100 Money purchase plans d

Number of plans 62,000 98.2 1.1 0.2% 0.4 100

Number of participants 2,064,000 99.6 0.3 0.2 c 100

Amount of assets (billions) $63.9 99.8 0.1 c c 100 Owner- Only Plans e

Number of plans 182,000 97.4 2.2 0.4 0 100

Number of participants 187,000 97.0 2.6 0.4 0 100

Amount of assets (billions) $32.3 97.1 2.8 0.1 0 100 Overall

Number of plans 529,000 98.3 1.3 0.2 0.2 100

Number of participants 14,429,000 90.2 9.7 c c 100

Amount of assets (billions) $416.2 97.9 2.1 c c 100

Note: Percentages in this table may not sum to 100 because of rounding. The
qualification failure data are estimates based on the results of IRS
auditing random samples of three types of pension plans as part of a
compliance research effort. The 95- percent sampling error for all estimates
in the table was less than 3 percentage points. This means that we are 95-
percent confident that the range of the reported value, ï¿½ 3 percentage
points, will contain the actual population value. For example, if the
reported value is 90 percent, we are 95- percent certain that the interval
87 to 93 percent contains the actual value. a Determination based on whether
IRS' random audits yielded a closing agreement.

b A profit- sharing plan is established and maintained by an employer to
provide employees or their beneficiaries with a means to share in the
employer's profits. The profit sharing data are based on the results of IRS'
random audits done as part of its fiscal year 1998 audit workplan. c
Represents less than one- tenth of 1 percent.

d A money purchase plan is established and maintained by an employer to
provide employees or their beneficiaries with benefits based on fixed
employer contributions. The money purchase data are based on the results of
IRS' random audits done as a part of its fiscal year 1998 audit workplan. e
An owner- only plan is a category of plans in which the business owners and
their spouses are the

only participants. Most, but not all of these plans, are defined
contribution plans. The owner- only data are based on the results of IRS'
random audits done as a part of its fiscal year 1995 audit workplan.

Source: Qualification failure estimates were computed by GAO based on IRS
research data. Total population data were provided by IRS.

Table II. 1: Qualification Failures Among Certain Types of Pension Plans

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 21 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Self- reported by pension plans Description of qualification failure Found
by

IRS audits VCR

Program Walk- In Program Total Document failure

Nonamender (statutory changes) Pre- Tax Reform Act of 1986 a 35 b 77 112

Tax Reform Act of 1986 c 144 b 293 437

Post- Tax Reform Act of 1986 d 45 b 96 141

Incomplete or incorrect plan provisions e Plan participation or coverage
requirements 3 b 8 11

Contributions or benefit requirements 3 b 12 15

Nondiscrimination requirements 3 b 12 15

Distribution or payment requirements 0 b 4 4

Vesting requirements 4 b 11 15

Funding requirements 0 b 0 0

Exclusive benefit requirements 0 b 0 0

Other requirements 1 b 10 11

Amendments adopted within remedial period– 401( b) 2 b 17 19

Timely adoption of plan (TR 1.401- 1( a)( 2)) 6 b 20 26

Other 0 b 3 3 Subtotal 246 563 809 Operational failure

Plan participation or coverage requirements Minimum coverage– 410( b)
3 2 6 11

Minimum participation– 401( a)( 26) 0 0 8 8

Excluded employees: age/ service time– 410( a)( 1)( A), 410( a)( 2)-(
3) 2 27 24 53

Excluded employees: other– 410( a) 17 144 8 169

Included ineligible employees– 410( a) 4 41 37 82

Timely participation– 410( a)( 4) 12 9 12 33

Participation or coverage– other: 410, (TR 1. 401- 1( a)( 2)) 7 19 6
32

Contributions or benefit requirements Limit on employee contributions–
401( a)( 30), 402( g) 4 41 3 48

Limit on employer/ employee contributions– 415 24 125 24 173

Misallocation or miscalculation of contributions (TR 1. 401- 1( a)( 2)) f 27
253 69 349

Misallocation of forfeitures (TR 1. 401- 1( a)( 2)) f 3 55 9 67

Misallocation of earnings (TR 1.401- 1( a)( 2)) f 3 12 3 18

Contributions or benefits– other: (TR 1. 401- 1( a)( 2)) 15 120 31 166

Nondiscrimination requirements ADP testing– 401( k)( 3), (8) 31 91 17
139

ACP testing– 401( m)( 2), (6) 14 35 11 60

Multiple use test– TR 1.401( m)- 2( b) 3 11 2 16

General nondiscrimination rules– 401( a)( 4) 19 2 9 30

Salary cap– 401( a)( 17) 23 63 15 101

Top heavy rules– 401( a)( 10), 416 10 55 16 81

Social Security integration/ permitted disparity– 401( l) 3 2 10 15

Nondiscrimination– other: (TR 1. 401- 1( a)( 2)) e 3 0 1 4

Distribution or payment requirements Required minimum distributions–
401( a)( 9) 17 79 13 109 Table III. 1: Qualification Failures Identified in
IRS Audits and Self- Reported by Pension Plans

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 22 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Self- reported by pension plans Description of qualification failure Found
by

IRS audits VCR Program Walk- In

Program Total

Commencement of benefits– 401( a)( 14) 5 13 3 21

In- service distributions– 401( k)( 10) 1 23 8 32

Rollover requirements– 401( a)( 31) 2 12 10 24

Loan requirements– 72( p), (TR 1.401- 1( a)( 2)) e 6 30 34 70

Hardship distributions– 401( k)( 2) 2 35 5 42

Small lump- sum distributions– 411( a)( 11) 3 39 7 49

Distributions made prior to distributable event: 401( a), (k) 1 14 5 20

Distributions/ payments– other: (TR 1.401- 1( a)( 2)) e 3 78 13 94

Vesting requirements Vesting rules– 411( a) 15 74 31 120

Accrued benefits– 411( b) 1 13 7 21

Plan amendment– effect on benefits– 411( d)( 6) 3 0 18 21

Plan termination– effect on benefits– 411( d)( 3) 3 2 24 29

Vesting– other: 411, (TR 1. 401- 1( a)( 2)) e 10 11 3 24

Funding requirements Failure to make contributions to plan (TR 1. 401- 1(
a)( 2)) e 1 18 13 32

Funding of plan– other (TR 1.401- 1( a)( 2)) e 2 28 14 44

Exclusive benefit requirements– 401( a)( 2) 0 0 2 2

Other requirements Merger/ consolidation– 401( a)( 12), 414( l) 1 2 0
3

Assignment/ alienation– 401( a)( 13)( A) 2 4 16 22

Joint and survivor annuity/ spousal protection– 401( a)( 11), 417 17
54 26 97

Aggregation rules– 414( b),( c) 0 2 7 9

Employee stock option plan rules– 401( a)( 28) 1 9 0 10

Other: 401( a), (TR 1.401- 1( a)( 2)) 6 34 14 54 Subtotal 329 1,680 594
2,603 Demographic failure

Nondiscriminatory contributions/ benefits– 401( a)( 4) 10 b 10 20

Minimum participation requirements– 401( a)( 26) 6 b 7 13

Minimum coverage requirements– 410( b) 6 b 7 13 Subtotal 22 24 46
Total number of failures 597 1,680 1,181 3,458

Note: Values for the number of failures for the VCR Program and totals are
estimates. The 95- percent confidence interval around each estimate is no
more than 20 failures away from the value of the estimate. Audit and Walk-
in Program data represent all cases. a Plans failed to amend timely for law
changes made before the Tax Reform Act of 1986 and may also

have failed to amend for subsequent tax law changes. b Not applicable.

c Plans failed to amend timely for tax law changes made in the Tax Reform
Act of 1986 and may also have failed to amend for subsequent tax law
changes. d Plans failed to amend timely for tax law changes made after the
Tax Reform Act of 1986.

e Specific requirements included in these general categories are described
under plan operational failures. f Failures in this category generally
represent failures to operate according to relevant plan provisions.

Source: GAO review of IRS closing agreements and compliance statements.

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 23 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Defined contribution Description of qualification failure Defined

benefit Profit

sharing Money

purchase Stock

bonus Other Missing data Total Document failure

Nonamender (statutory changes) Pre- Tax Reform Act of 1986 ,a 16 29 21 3 3
40 112

Tax Reform Act of 1986 b 67 162 45 16 17 130 437

Post- Tax Reform Act of 1986 c 20 91 10 4 2 14 141

Incomplete or incorrect plan provisions: d Plan participation or coverage
requirements 1 8 1 0 1 0 11

Contributions or benefit requirements 1 8 2 0 1 3 15

Nondiscrimination requirements 4 7 3 0 1 0 15

Distribution or payment requirements 0 3 0 0 0 1 4

Vesting requirements 5 7 0 0 0 3 15

Funding requirements 0 0 0 0 0 0 0

Exclusive benefit requirements 0 0 0 0 0 0 0

Other requirements 2 7 1 0 0 1 11

Amendments adopted within remedial period– 401( b) 4 9 3 0 1 2 19

Timely adoption of plan (TR 1.401- 1( a)( 2)) 0 16 7 0 0 3 26

Other 0 3 0 0 0 0 3 Subtotal 120 350 93 23 26 197 809 Operational failure

Plan participation or coverage requirements Minimum coverage– 410( b)
1 8 2 0 0 0 11

Minimum participation– 401( a)( 26) 0 5 1 0 0 2 8

Excluded employees: age/ service time– 410( a)( 1)( A), 410( a)( 2)-(
3) 9 35 5 0 0 4 53

Excluded employees: other– 410( a) 11 132 24 2 0 1 169

Included ineligible employees– 410( a) 3 64 6 1 2 6 82

Timely participation– 410( a)( 4) 1 24 5 0 0 3 33

Participation or coverage– other: 410, (TR 1. 401- 1( a)( 2)) 2 18 5 0
5 3 32

Contributions or benefit requirements Limit on employee contributions–
401( a)( 30), 402( g) 0 46 1 0 1 0 48

Limit on employer/ employee contributions- 415 17 129 11 3 5 9 173

Misallocation or miscalculation of contributions (TR 1. 401- 1( a)( 2)) e 76
222 28 3 4 17 349

Misallocation of forfeitures (TR 1. 401- 1( a)( 2)) e 0 55 5 3 5 0 67

Misallocation of earnings (TR 1.401- 1( a)( 2)) e 0 15 2 2 0 0 18

Contributions or benefits– other (TR 1. 401- 1( a)( 2)) 14 126 14 1 3
8 166

Nondiscrimination requirements ADP testing– 401( k)( 3), (8) 0 133 0 2
0 4 139

ACP testing– 401( m)( 2), (6) 2 52 3 2 1 1 60

Multiple use test– TR 1.401( m)- 2( b) 0 14 0 2 0 0 16

General nondiscrimination rules– 401( a)( 4) 2 19 7 0 0 2 30

Salary cap –401( a)( 17) 5 73 18 0 2 3 101

Top heavy rules– 401( a)( 10), 416 4 69 6 0 0 2 81

Social Security integration/ permitted disparity– 401( l) 5 6 3 0 0 1
15

Nondiscrimination– other 0 3 1 0 0 0 4

Distribution or payment requirements Required minimum distributions–
401( a)( 9) 46 48 11 2 0 2 109 Table III. 2: Qualification Failures by Plan
Type

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 24 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Defined contribution Description of qualification failure Defined

benefit Profit sharing Money

purchase Stock bonus Other Missing

data Total

Commencement of benefits– 401( a)( 14) 13 6 0 0 1 2 21

In- service distributions– 401( k)( 10) 1 20 4 0 3 5 32

Rollover requirements– 401( a)( 31) 1 18 3 0 1 1 24

Loan requirements– 72( p), (TR 1.401- 1( a)( 2)) e 2 38 6 7 5 13 70

Hardship distributions– 401( k)( 2) 0 41 0 0 0 1 42

Small lump- sum distributions– 411( a)( 11) 27 18 1 0 3 0 49

Distributions made prior to distributable event– 401( a), (k) 3 12 3 0
0 3 20

Distributions/ payments– other:( TR 1.401- 1( a)( 2)) 17 60 1 9 0 7 94

Vesting requirements Vesting rules– 411( a) 43 61 9 2 0 6 120

Accrued benefits– 411( b) 17 5 0 0 0 0 21

Plan amendment– effect on benefits– 411( d)( 6) 7 8 4 0 0 2 21

Plan termination– effect on benefits– 411( d)( 3) 21 5 0 0 1 2
29

Vesting– other( TR 1. 401- 1( a)( 2)) 5 17 1 0 0 1 24

Funding requirements Failure to make contributions to plan (TR 1. 401- 1(
a)( 2)) e 0 17 7 4 0 4 32

Funding of plan– other (TR 1.401- 1( a)( 2)) e 0 31 8 0 3 3 44

Exclusive benefit requirements– 401( a)( 2) 0 1 1 0 0 0 2

Other requirements Merger/ consolidation– 401( a)( 12), 414( l) 2 1 0
0 0 0 3

Assignment/ alienation– 401( a)( 13)( A) 1 14 0 0 5 2 22

Joint and survivor annuity/ spousal protection– 401( a)( 11), 417 43
32 16 2 1 2 97

Aggregation rules– 414( b), (c) 1 7 1 0 0 0 9

Employee stock option plan rules– 401( a)( 28) 0 8 0 2 0 0 10

Other( TR 1. 401- 1( a)( 2)) 3 25 8 10 2 6 54 Subtotal 403 1,738 228 56 51
127 2,603 Demographic failure

Nondiscriminatory contributions/ benefits– 401( a)( 4) 0 12 4 0 0 4 20

Minimum participation requirements– 401( a) 2 5 2 0 0 4 13

Minimum coverage requirements– 410( b) 3 5 3 0 0 2 13 Subtotal 5 22 9
0 0 10 46 Total number of failures 528 2,110 330 79 77 334 3,458

Note: The 95- percent confidence interval around each estimate is no more
than 20 failures away from the value of the estimate. a Plans failed to
amend timely for law changes made before the Tax Reform Act of 1986 and may
also

have failed to amend for subsequent tax law changes. b Plans failed to amend
timely for tax law changes made in the Tax Reform Act of 1986 and may also

have failed to amend for subsequent tax law changes. c Plans failed to amend
timely for tax law changes made after the Tax Reform Act of 1986.

d Specific requirements included in these general categories are described
under plan operational failures. e Failures in this category generally
represent failures to operate according to relevant plan provisions.

Source: GAO review of IRS closing agreements and compliance statements.

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 25 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Number of participants Description of qualification failure

10 or fewer 11-

50 51- 100 101-

300 301- 1,000 1,000 10,000 More than

10,000 Missing data Total Document failure

Nonamender (statutory changes) Pre- Tax Reform Act of 1986 a 81 22 2 2 1 0 0
4 112

Tax Reform Act of 1986 b 301 77 19 20 10 1 0 9 437

Post- Tax Reform Act of 1986 c 58 41 13 14 10 3 0 2 141

Incomplete or incorrect plan provisions: d Plan participation or coverage
requirements 0 3 3 1 2 2 0 0 11

Contributions or benefit requirements 3 6 1 2 0 1 0 2 15

Nondiscrimination requirements 4 0 5 2 3 1 0 0 15

Distribution or payment requirements 0 0 0 0 3 0 0 1 4

Vesting requirements 2 3 1 3 2 2 0 2 15

Funding requirements 0 0 0 0 0 0 0 0 0

Exclusive benefit requirements 0 0 0 0 0 0 0 0 0

Other requirements 0 2 2 2 3 2 0 0 11

Amendments adopted within remedial period– 401( b) 1 10 3 1 4 0 0 0 19

Timely adoption of plan–( TR 1.401- 1( a)( 2)) 5 11 2 3 2 1 0 2 26

Other 2 0 1 0 0 0 0 0 3 Subtotal 457 175 52 50 40 13 0 22 809 Operational
failure

Plan participation or coverage requirements Minimum coverage– 410( b)
2 3 1 4 1 0 0 0 11

Minimum participation– 401( a)( 26) 4 3 0 0 0 0 0 1 8

Excluded employees: age/ service time– 410( a)( 1)( A), 410( a)( 2)-(
3) 8 9 7 6 6 12 4 1 53

Excluded employees: other– 410( a) 31 54 24 22 12 24 2 1 169

Included ineligible employees– 410( a) 1 21 15 11 10 20 0 4 82

Timely participation– 410( a)( 4) 5 13 5 4 4 1 0 2 33

Participation or coverage– other: 410, (TR 1. 401- 1( a)( 2)) 5 11 6 0
10 0 0 2 32

Contributions or benefit requirements Limit on employee contributions–
401( a)( 30), 402( g) 5 12 6 11 8 5 2 0 48

Limit on employer/ employee contributions– 415 30 33 16 25 28 30 6 6
173

Misallocation or miscalculation of contributions (TR 1. 401- 1( a)( 2)) e 45
55 28 65 33 75 41 7 349

Misallocation of forfeitures (TR 1. 401- 1( a)( 2)) e 4 11 12 25 12 3 0 0 67

Misallocation of earnings (TR 1.401- 1( a)( 2)) e 4 9 2 4 0 0 0 0 18

Contributions or benefits– other 12 42 11 39 28 24 5 5 166

Nondiscrimination requirements ADP testing– 401( k)( 3), (8) 13 36 21
36 15 15 1 3 139

ACP testing– 401( m)( 2), (6) 4 13 13 13 4 10 3 0 60

Multiple use test– TR 1.401( m)- 2( b) 0 2 3 5 3 4 0 0 16

General nondiscrimination rules– 401( a)( 4) 17 6 1 5 1 0 0 0 30

Salary cap– 401( a)( 17) 28 13 16 15 20 6 4 0 101

Top heavy rules– 401( a)( 10), 416 21 41 8 3 5 3 0 0 81

Social Security integration/ permitted disparity– 401( l) 5 6 2 0 0 2
0 0 15 Table III. 3: Qualification Failures by Plan Size

Appendix III Results of Our Analyses of Pension Plan Qualification Failures
Resolved in Fiscal Year 1999

Page 26 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Number of participants Description of qualification failure 10 or

fewer 11- 50 51-

100 101- 300 301-

1,000 1,000 10,000 More than

10,000 Missing data Total

Nondiscrimination– other( TR 1. 401- 1( a)( 2)) 3 0 0 0 0 1 0 0 4

Distribution or payment requirements Required minimum distributions–
401( a)( 9) 11 20 7 6 13 34 19 0 109

Commencement of benefits– 401( a)( 14) 0 1 0 3 1 9 8 0 21

In- service distributions– 401( k)( 10) 9 10 1 4 5 2 0 2 32

Rollover requirements– 401( a)( 31) 0 13 3 3 1 2 2 1 24

Loan requirements– 72( p), (TR 1.401- 1( a)( 2)) e 17 15 2 10 7 8 2 10
70

Hardship distributions– 401( k)( 2) 0 5 1 17 7 10 2 1 42

Small lump- sum distributions– 411( a)( 11) 2 5 3 7 13 13 5 0 49

Distributions made prior to distributable event– 401( a),( k) 6 6 2 4
0 2 0 1 20

Distributions/ payments– other( TR 1. 401- 1( a)( 2)) 0 25 8 25 11 19
2 4 94

Vesting requirements Vesting rules– 411( a) 9 10 22 10 9 19 36 13 3
120

Accrued benefits– 411( b) 1 4 0 1 4 11 1 0 21

Plan amendment– effect on benefits– 411( d)( 6) 4 1 1 4 6 4 0 1
21

Plan termination– effect on benefits– 411( d)( 3) 22 2 3 0 0 2 0
0 29

Vesting– Other( TR 1. 401- 1( a)( 2)) 3 9 1 3 4 4 0 1 24

Funding requirements Failure to make contributions to plan (TR 1. 401- 1(
a)( 2)) e 7 8 1 5 4 5 0 2 32

Funding of plan– other (TR 1.401- 1( a)( 2)) e 5 3 7 10 9 11 0 0 44

Exclusive benefit requirements– 401( a)( 2) 0 1 1 0 0 0 0 0 2

Other requirements Merger/ Consolidation– 401( a)( 12), 414( l) 0 1 0
0 0 0 2 0 3

Assignment/ Alienation– 401( a)( 13)( A) 3 7 0 3 7 1 0 1 22

Joint and Survivor Annuity/ spousal protection– 401( a)( 11), 417 12
21 6 8 8 29 13 0 97

Aggregation Rules– 414( b), (c) 2 1 2 3 0 1 0 0 9

Employee stock option plan rules– 401( a)( 28) 1 4 2 0 2 0 2 0 10

Other– 401( a),( TR 1.401- 1( a)( 2)) 8 13 7 9 0 12 2 4 54 Subtotal
368 586 262 426 317 447 137 60 2,603 Demographic failure

Nondiscriminatory contributions/ benefits – 401( a)( 4) 11 3 4 2 0 0 0
0 20

Minimum participation requirements – 401( a)( 26) 10 2 0 0 0 0 0 1 13

Minimum coverage requirements – 410( b) 9 2 1 1 0 0 0 0 13 Subtotal 30
7 5 3 0 0 0 1 46 Total number of failures 855 768 319 479 357 460 137 83
3,458

Note: The 95 percent confidence interval around each estimate is no more
than 20 failures away from the value of the estimate. a Plans failed to
amend timely for law changes made before the Tax Reform Act of 1986 and may
also

have failed to amend for subsequent tax law changes. b Plans failed to amend
timely for tax law changes made in the Tax Reform Act of 1986 and may also

have failed to amend for subsequent tax law changes. c Plans failed to amend
timely for tax law changes made after the Tax Reform Act of 1986.

d Specific requirements included in these general categories are described
under plan operational failures. e Failures in this category generally
represent failures to operate according to relevant plan provisions.

Source: GAO review of IRS closing agreements and compliance statements.

Appendix IV Comments From the Internal Revenue Service

Page 27 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Appendix IV Comments From the Internal Revenue Service

Page 28 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Appendix V GAO Contacts and Staff Acknowledgments

Page 29 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Cornelia M. Ashby, (202) 512- 9110 Thomas Richards, (202) 512- 9110

In addition to those named above, Ed Nannenhorn, Ellen Rominger, Wendy
Ahmed, Susan Baker, Robert DeRoy, John Mingus, and James Wozny made key
contributions to this report. GAO Contacts

Acknowledgments

Page 30 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

Page 31 GAO/ GGD- 00- 169 Pension Plan Qualification Issues

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