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
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• 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;

• 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

• 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,

• 42 percent experienced plan document failures (i.e., the documents

governing plan operations did not comply with tax law requirements);

• 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
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• 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);

• 9 percent had both operational and document failures; and

• 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 times5

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
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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 plans9 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.

10In 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.
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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:

• 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;

• An operational failure occurs when a plan sponsor fails to follow

provisions of the plan document in operating the plan; and

• A demographic failure occurs when a plan sponsor does not comply with

specific provisions of pension law11 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

Operationala

•Correction limited to conforming plan

operations to plan document provisions,

plan amendments not permitted

•Written document specifying the corrective

action must be approved by IRSb

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

•Correction by conforming plan operations

to plan document provisions and/or

amending plan documents

•Written 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

•Correction by conforming plan operations

to plan document provisions and/or

amending plan documents

•Written 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

11A 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
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(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 Bonusa5 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
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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:

• 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;

• 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;

• 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

• 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

1295-percent confidence interval: 2.1 to 2.3 failures.

13We 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
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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:

• Plans that were eligible to use the VCR Program14 could have avoided audit

sanctions that we estimate were about 13 times15 greater than the

applicable VCR fee.

• Plans that were eligible to use the Walk-In Program16 could have avoided

audit sanctions that we estimate were about 30 percent17 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

assetsa

Number of

participants

Less than

$500,000

$500,000

or more

Walk-In

fee rangebAudit 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.

14A reporting program designed to correct certain operational qualification failures.

1595-percent confidence interval: 9.9 to 16.1 times.

16A 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.

1795-percent confidence interval: 20 to 40 percent.

Table 3: IRS Qualification Failure

Sanction Guidelines
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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 Minimuma 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

participant18 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

1895-percent confidence interval: $1,021 to $1,313.

1995-percent confidence interval: $42 to $94.

Table 4: Minimum and Maximum

Compliance Fees for Self-Reporting

Plans
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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

20As 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
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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
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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
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Key contributors to this report are acknowledged in appendix V. If you

have any questions, you may contact me or Thomas Richards on (202) 512-

9110.

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

Appendix II 20

Results of IRS

Compliance Research

Appendix III 21

Results of Our

Analyses of Pension

Plan Qualification

Failures Resolved in

Fiscal Year 1999

Appendix IV 27

Comments From the

Internal Revenue

Service

Appendix V 29

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:

• 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;

• Visited the four IRS district offices responsible for coordinating the audit

and Walk-In programs1

to identify all cases closed under these programs

during fiscal year 1999;2

• 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

• 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;

• 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;

• 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

• 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:

• 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;

• 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;

• 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;

• 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;

• Provided IRS program officials with our Walk-In and VCR compliance fee

estimates for their review and concurrence; and

• 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

failuresa

Uncorrectable

qualification failures

(revocations) Unknown Total

Profit-sharing plansb

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 c100

Money purchase plansd

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 Planse

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 c100

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, ± 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 1986a 35 b 77 112

Tax Reform Act of 1986c144 b293 437

Post-Tax Reform Act of 1986d45 b96 141

Incomplete or incorrect plan provisionse

Plan participation or coverage requirements 3 b 8 11

Contributions or benefit requirements 3 b12 15

Nondiscrimination requirements 3 b 12 15

Distribution or payment requirements 0 b4 4

Vesting requirements 4 b11 15

Funding requirements 0 b0 0

Exclusive benefit requirements 0 b0 0

Other requirements 1 b 10 11

Amendments adopted within remedial period–401(b) 2 b17 19

Timely adoption of plan (TR 1.401-1(a)(2)) 6 b20 26

Other 0 b3 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))f27 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))f3 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))e6 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))e3 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))e10 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))e2 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 b10 20

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

Minimum coverage requirements–410(b) 6 b7 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 1986b67 162 45 16 17 130 437

Post-Tax Reform Act of 1986c 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))e76 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))e0 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))e2 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))e0 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 1986a 81 22 2 2 1 0 0 4 112

Tax Reform Act of 1986b301 77 19 20 10 1 0 9 437

Post-Tax Reform Act of 1986c 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))e45 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))e7 8 1 5 4 5 0 2 32

Funding of plan–other (TR 1.401-1(a)(2))e5 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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