Pension Plans

By extending tax-exempt status to qualified pension plans, the nation's tax laws have been used both to promote the establishment of employer-sponsored pension plans and to regulate those plans. Internal Revenue Service (IRS) records for the most recent available year (1997) indicated that there were about 965,000 private, employer-sponsored, tax-qualified pension plans for about 127 million participants that amassed assets totaling about $3.6 trillion. For plans that might be at risk of losing their tax-exempt status because of deviations from tax code requirements, the IRS has developed two programs to encourage plan sponsors to: (1) detect and correct deviations; (2) report those corrections to IRS for approval; and (3) pay a compliance fee. For IRS qualification failure case closings in fiscal year 1999, 42 percent of 1,802 pension plans had plan document failures, 66 percent had one operational failure, less than two percent had demographic failures, and nine percent had both operational and document failures. Pension plan sponsors were assessed monetary sanctions that GAO estimated were 10 times greater than the compliance fee that could have been assessed had the plan sponsors reported the qualification failures to IRS for supervised correction. IRS and pension experts thought that existing IRS programs could be enhanced.

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.