The IRC permits employers to sponsor defined contribution (DC) retirement plans and outlines requirements to which plan sponsors must adhere for tax-qualified status. With DC plans, employees have individual accounts to which employers, employees, or both make periodic contributions. DC plan benefits are based on the contributions to, and investment returns on, the individual accounts, and the employee bears the investment risk. In some types of DC plans, including 401(k), 403(b), and 457 plans and the Savings Incentive Match Plan for Employees (SIMPLE), employees may choose to make tax-deferred contributions instead of receiving the same amount as taxable salary. IRS and the Pension and Welfare Benefits Administration (PWBA) of the Department of Labor are primarily responsible for enforcing laws related to private DC plans. Under the Employee Retirement Income Security Act (ERISA) of 1974, IRS and PWBA jointly enforce standards for coverage and participation, for vesting, and for funding that, respectively, determine how plan participants become eligible to participate in benefit plans, define how participants become eligible to earn rights to benefits, and ensure that plans have sufficient assets to pay promised benefits. IRS also enforces provisions of the IRC that apply to tax-qualified pension plans, including provisions under section 401(k) of the Code. PWBA enforces ERISA’s reporting and disclosure provisions and fiduciary standards, which concern how pension plans should operate in the best interest of participants. Since the IRS 401(k) plan compliance study was undertaken in 1995, various changes have occurred in certain legal requirements for tax- qualified status that IRS examined in the study. Certain requirements IRS examined in the 401(k) study are no longer applicable to tax-qualified DC plans or have been materially modified. Also, the IRC has since been amended to permit employers to adopt SIMPLE 401(k) plans and safe- harbor design methods for 401(k) plans. SIMPLE 401(k) plans and safe- harbor designs exempt 401(k) plan sponsors from certain rules that apply generally to 401(k) plans. However, many of the statutory requirements that IRS examined in the 401(k) study have not changed materially. We were not able to assess the extent to which changes in relevant pension laws and 401(k) plan designs have affected the overall prevalence and incidence of noncompliance among the population of 401(k) plans (see app. II for more detail on changes in relevant pension laws since the study was published). IRS groups violations of the IRC and corresponding regulations that must be satisfied to achieve tax-qualified status into four categories. Plan Document failure occurs when the language of the plan documents does not comply with provisions of the tax Code. Operational failure occurs when the implementation and operation of a plan does not comply with provisions of the tax Code. Demographic failure occurs when a plan fails to comply with fundamental nondiscrimination requirements faced by all tax-qualified plans. Employer Eligibility failure occurs when an employer that is not allowed to establish a section 401(k) plan, such as a state or local government, adopts such a plan. IRS issued Revenue Procedure 2001-17 in February 2001 to establish its current framework for promoting the compliance of tax-qualified pension plans with the applicable requirements of the IRC. This framework has evolved since IRS first introduced voluntary compliance procedures in the early 1990s. To promote compliance, IRS developed the Self-Correction Program (SCP), the Voluntary Correction Program (VCP), and the Audit Correction Agreement Program (Audit CAP). SCP is used to correct insignificant Operational failures at any time, without fee or sanction and without IRS supervision. VCP allows plan sponsors to voluntarily report and correct all types of qualification failures with IRS approval. Upon receiving IRS approval of the proposed correction measures, plan sponsors must implement the specified corrective measures and pay a compliance fee, one that is, on average, much less than the financial sanctions assessed for violations identified by IRS audits. The Audit CAP allows plan sponsors to correct all types of qualification failures that IRS identifies through formal audits. Under Audit CAP, plan sponsors must correct all qualification failures and pay a negotiated financial sanction commensurate with the nature, extent, and severity of the failures. If IRS and the plan sponsor do not reach an agreement with respect to the correction of the failure(s), IRS can pursue disqualification of the plan for tax purposes. All IRS audits of tax-qualified employer-sponsored plans are carried out under one of two audit programs, the Examination Program or the Compliance Research Program. The Examination Program includes a wide range of compliance-related activities. These activities include auditing based on referrals and computer targeting, training for IRS examiners who perform plan audits, and reviewing closed audit cases. The Compliance Research Program sponsors studies, such as the 401(k) study, to identify and monitor noncompliance among private plans. Compliance studies are based on plan audits, which IRS conducts so that it can collect study data. IRS is in various stages of planning and conducting compliance research on several types of private pensions, and intends to use data from these studies to develop more effective enforcement and compliance activities. However, plan audits conducted under the auspices of the Compliance Research Program represent a small proportion of IRS’s total audit activity. In fiscal year 2001, IRS plans allocated a total of 1,845 staff days to audits for the Compliance Research Program, compared with 33,734 staff days allocated to audits for the Examination Program. For fiscal year 2002, IRS plans to increase the number of staff days related to compliance research activities, but direct examination activities will still constitute the majority of IRS’s audit work. Audits of employer pension plans are initiated when the IRS selects for audit a plan return, or form 5500 filing, from the Return Inventory Classification System. A notification letter is sent to the plan sponsor with a request for information that the examiner needs to complete the audit. IRS examiners complete a process that includes interviewing the plan benefits administrator, reviewing plan documents, and holding a closing conference to discuss the results of the audit with the plan sponsor. If an examiner finds a qualification issue, or a failure that can potentially disqualify a plan’s tax-exempt status, the examiner can resolve the violation through correction under IRS’s SCP (Self-Correction Program disposal) or enter into a closing agreement with the plan sponsor through the Audit CAP (closing agreement disposal). Both of these audit disposal methods indicate that the examiner identified a violation that could potentially disqualify the plan, but the Audit CAP closing represents a more significant disposal than correction under the SCP. IRS audited a sample of 401(k) plans to collect data and estimate noncompliance with certain requirements of the Internal Revenue Code. IRS examiners were provided with a questionnaire to obtain information on the compliance of these 401(k) plans after conducting the audits. Once the data were gathered, IRS identified 73 study questions that could indicate whether or not a plan was in compliance. IRS data analyses produced estimates on the number of plans that failed to comply in one or more instances, based on the answers to these 73 compliance indicators. IRS’s original estimates on noncompliance decreased after some adjustments were made to its initial analysis. In selecting a sample of plans to study, IRS analyzed a database that it maintains on the population of tax-qualified plans. This database contains records of form 5500 returns that plan sponsors file with the IRS and Department of Labor, and IRS identified pension plans that had reported a 401(k) feature for the 1993 plan year. IRS identified 143,535 plans that reported a 401(k) plan feature, but excluded about 470 plans prior to sample selection, because these plans had no participants at the end of 1993 or had recently been audited by IRS. This step reduced the population to 142,768 401(k) plans from which IRS would select plans to study. These remaining 401(k) plans were subdivided evenly by size into three groups labeled small, medium, and large plans. To create a sample of 525 plans, IRS randomly drew equal numbers of plans from these small, medium, and large categories. The method that IRS used to create the sample of 525 401(k) plans from these categories was basically equivalent to drawing a simple random sample in which each plan had an equal probability of selection. However, before drawing 175 plans from each of these three groups, IRS carved out the 25 largest plans from the large-plan category and put these plans into a separate group that it called “super- large plans”; this super large category was selected as a 100 percent sample of the largest 401(k) plans. Taken together, IRS’s sampling method was intended to produce a representative sample from, and reliable results for, the 401(k) plan population. The sample of 550 plans was assigned to IRS key district offices, where study coordinators were responsible for selecting the plan’s 1994 form 5500 return and assigning the plan to an IRS examiner for audit. IRS examiners were provided a questionnaire to obtain information on the compliance of the 401(k) plans and were instructed to complete the questionnaire after auditing each plan in the study. IRS examiners’ answers to the study questions were based on their plan audits. The questionnaire, or check sheet, that IRS used for its study was originally developed as part of a broad information-gathering project and included 254 questions to obtain information on 401(k) plan characteristics, design features, and compliance with certain requirements of the IRC. IRS used this available questionnaire to collect data relevant to its study objective of measuring 401(k) plan compliance. Once the study questionnaires were completed, they were sent to IRS Employee Plans headquarters for review and data analysis. Prior to its data analysis of 401(k) plan noncompliance, IRS reviewed all 550 questionnaires and excluded 78 of them from the analysis because the study questionnaire contained insufficient data or because the plan erroneously reported a 401(k) plan feature.