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Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports – Nonqualified 401(k) Plans

Nonqualified 401(k) Plans Project Overview

The Employee Plans Compliance Unit (EPCU) Nonqualified 401(k) Plans project began in February 2013. We sent contact letters to a sample of plan sponsors that showed their 401(k) plans were nonqualified. We wanted to learn whether they made a mistake when selecting pension feature codes 2J and 3C on their Form 5500 series returns to describe their plan’s characteristics.

Pension feature code 2J means:

‘Code section 401(k) feature - A cash or deferred arrangement described in [Internal Revenue] Code section 401(k) that is part of a qualified defined contribution plan that provides for an election by employees to defer part of their compensation or receive these amounts in cash’

Pension feature code 3C means:

‘Plan not intended to be qualified – A plan not intended to be qualified under [Internal Revenue] Code sections 401, 403 or 408’.

Results

Responses showed that 87% of plan sponsors in the sample made filing errors showing that their plan was not a qualified 401(k) plan. A 401(k) plan must be a qualified plan.

A few other sponsors in the sample mistakenly showed their plan was a 401(k) plan when it was not; it was a profit sharing plan. A 401(k) plan is a type of profit sharing plan, but a profit sharing is not necessarily a 401(k) plan.

In both situations, sponsors made mistakes when selecting the pension feature codes that describe their plan characteristics. All of the sponsors in the sample intended their plans to be qualified plans under Internal Revenue Code section 401, 403 or 408.

The plans that correctly indicated they were nonqualified 401(k) plans were those only intended to be qualified by the Hacienda, the Puerto Rico tax authority, and not under the Internal Revenue Code.

Errors

The sponsors in the sample made mistakes by incorrectly choosing pension feature code 3C with their 401(k) plan (pension feature code 3J). To prevent these errors, sponsors and practitioners need to review the pension feature codes carefully before selecting and inserting them on the Form 5500 series return.

Background

The EPCU designed the project to learn whether sponsors that selected pension feature codes 2J and 3C on their Form 5500 series return correctly indicated they didn’t intend their plans to be qualified 401(k) plans.

This information helps Employee Plans have a better understanding of the qualified plan sector and assists with development of tools, guidance and enforcement efforts.

The project goals were to:

  • Identify and correct form and operational issues related to nonqualified 401(k) plans, and
  • Correct any Form 5500 return filing issues.
Page Last Reviewed or Updated: 09-Sep-2014