IRS official and private practitioner highlight compliance problems with 403(b) plans

IRS Employee Benefits Specialist Daniel Gardner, 403(b)/457 plan compliance co-coordinator, Mid-Atlantic Area, and Ellie Lowder, benefits consultant, public education and tax-exempt employers, discussed issues of concern involving 403(b) tax-sheltered annuity plans. Gardner and Lowder spoke on an August 21, 2013 webinar sponsored by the American Society of Pension Professionals & Actuaries (ASPPA) and the National Tax Sheltered Accounts-ASPPA Association.

Gardner works for the IRS’s field examination function and directs a cadre of revenue agents. He noted that the IRS used to look at “everything” when auditing 403(b) plans and that audits could be quite burdensome. Now, the IRS focuses on five major areas of compliance, including written plan document requirements, universal availability of plan participation, excessive deferrals and early distributions.

Written plan documents have been required since the IRS adopted final regulations that took effect in 2009. In examinations from 2010 forward, plan documents are critical, Gardner said. He noted that most of the important 403(b) requirements are found in prototype agreements, such as Code Sec. 402(g) deferral limits, minimum distribution provisions, and rollover rules.

Universal availability

Universal availability of plan participation is a traditional concept for 403(b) plans, but the IRS has added a key component, known as “effective opportunity” to participate, according to Gardner. The regulations require that employers contact employees at least once a year to notify them that they can make or change elections regarding deferrals and participations.

The law used to provide exemptions from universal availability for collectively bargained employees, visiting professors, people taking vows of poverty and others, Gardner noted. However, these groups are no longer excluded; they must be offered an opportunity to participate in the plan. Furthermore, universal availability requires that, if some participants are offered the opportunity to make catchup or Roth deferrals, all participants must have the same opportunity.

Universal availability generally requires that the plan be available to anyone working 1,000 or more hours. Employers are not required to exclude employees working less than 1,000 hours, although many employers believe this is required. Furthermore, some employers have trouble keeping track of the hours of their part-time employees. They risk allowing some to participate despite working less than 1,000 hours, while excluding others, Lowder said.

There are other exclusions from the universal availability requirements, for participants in 401(k) and 457 plans, for employees under the student FICA exception and for nonresident aliens. Lowder pointed out that the tax code only allows the exclusion of actual participants in these other plans, while the regulations allow their exclusion merely if they are eligible to participate in 401(k) or 457 plans. In any case, violations of these rules can be expensive, according to Lowder.

Compliance checks

The IRS not only conducts audits but also performs compliance checks. These are conducted by the Employee Plans Compliance Unit. Checks are not an audit but may lead to an audit, Gardner said. Plans should treat compliance checks seriously. They may be used both for education and enforcement where the IRS believes there is significant noncompliance, he added.

Current compliance checks are focused on universal availability for plans maintained by colleges and universities; 457 plans maintained by private tax-exempt organizations (which must be unfunded and cannot provide for catchup deferrals); and universal availability for public schools’ plans. The public school check is looking at every school system, Gardner explained.

Source: IRS Employee Benefits Specialist Daniel Gardner, 403(b)/457 plan compliance co-coordinator, Mid-Atlantic Area, and Ellie Lowder, benefits consultant, public education and tax-exempt employers, speaking at an August 21, 2013 webinar sponsored by the American Society of Pension Professionals & Actuaries (ASPPA) and the National Tax Sheltered Accounts-ASPPA Association.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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