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Wrong Pension Feature Codes on 401(k) Plans

During the 401(k) Nonqualified Plans Project, the Employee Plans Compliance Unit (EPCU) looked at whether 401(k) plan sponsors selected the wrong pension feature on their Form 5500-series return that described their plans as nonqualified.

Project goals

We designed the 401(k) Nonqualified Plans Project to learn:

  1. If plan sponsors incorrectly selected pension feature codes 2J and 3C on their Form 5500-series return, which indicate they didn’t intend their 401(k) plans to be qualified plans.
  2. If plan sponsors selected the wrong codes, why they made this mistake.

Background

During the 401(k) Compliance Check Questionnaire Project, the EPCU discovered that some sponsors filed their 5500 return showing their plan was both a nonqualified plan and a 401(k) plan. The Internal Revenue Code requires a 401(k) plan to be a qualified plan.

Project Results

Overall, the project showed that sponsors of the sampled 401(k) plans made mistakes when describing their plan characteristics and listed 3C, showing their plan was a 401(k) plan not intended to be qualified under the Internal Revenue Code.

  • Pension feature code 2J means the plan has a Code section 401(k) feature – A cash or deferred arrangement described in IRC Section 401(k) is part of a qualified defined contribution plan that allows employees to elect to defer part of their compensation to the plan or to receive these amounts in cash.

  • Pension feature code 3C means the plan not intended to be qualified – A plan not intended to be qualified under IRC Sections 401, 403 or 408.

Some sponsors incorrectly selected pension feature code 2J when their plan was a profit-sharing plan, but not a 401(k) plan. A 401(k) plan is a type of profit-sharing plan, but a profit-sharing plan isn’t necessarily a 401(k) plan.

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

Make sure you understand the different pension feature codes that describe a plan’s characteristics. Selecting an incorrect code on your 5500 return could result in an EPCU compliance check or an examination of your plan.

Planning tips

Review your 401(k) plan to see if you used the correct pension feature codes on your Form 5500. If you’ve made a mistake, file an amended return electronically with the Department of Labor using the EFAST2 system. If you filed Form 5500-EZ, paper file your amended return with IRS.

Make sure you correct your plan administrative procedures to avoid making the same mistake again. It may be helpful to have at least two people review your 5500 return before you file it.

Contact us

If you have questions about this project, email us and include “Nonqualified 401(k) Plans” in the subject line.

Additional resources

Page Last Reviewed or Updated: 04-Mar-2014