IRC 403(b)/ 457 Outreach Program IRS Exams of 403(b) & 457 Plans.

IRC 403(b)/ 457 Outreach Program

IRS Exams of 403(b) & 457 Plans

IRC 403(b)/457 Outreach Program

Contact Information

Robert J. ArchitectTEGE

Washington, DC202-283-9634


Current Exam Issues – 403(b)

Ineligible EmployerExcess Elective Deferral contributions

Review of payroll records & HR records & W-2Universal availability

Review of payroll records and HR recordsPlan Loans violate IRC 72(p)

Review of account records & 1099-RImpermissible distributions-bad hardships

Review of account records & HR records & 1099-R

Contract provisions Review of contract


5 Year Post-Severance Contributions

No CODA must be employer contributions

Audit steps Will review plan Will review employment contracts Will review all documents for any cash

options Will review for guaranteed payouts upon

death


Sick & Vacation Pay Issues

Sick & Vacation Payments Avoiding constructive receipt Payroll records; Benefits Handbook;

Union Contracts

Elective Deferrals to 403(b), 457(b), or 401(k) – Timing 415 regulations


Sick & Vacation Pay Issues (cont)

Contributions to 401(a) plan If have cash option – Impermissible CODA -

GovernmentalContributions to 403(b)If subject to a cash option

treated as elective deferral and not eligible for special 5 year post-retirement contributions

Converting to employer contributions Attempts to avoid FICA Seek expert advice – many pitfalls

IRC 403(b)/ 457 Outreach Program

How 403(b) Regulations may impact exams –Based on

Current content of proposed regulations- Caution (a work in

progress)


Plan In Form & Operation

Must be maintained pursuant to a written DC plan

Both form and operation Future timely amendments

Audit Steps Will review plan provisions for form

and compare to plan operation


Universal Availability – 20 hour requirement

ER must reasonably expect employee to work < 1000 hours for ensuing 12-month period

Subsequent plan year or 12-month period the employee actually worked < 1000 hours in the preceding 12-month period

Audit steps – Must track hours


Universal Availability (cont)

Permissive exclusions - not allowed

• Collective bargaining employees• Visiting professors• Employees who have taken a vow of

poverty• Employee with a one-time election to

participate in a governmental non-403(b) plan


Form Requirements -Contract

401(g) – Transferability of annuities401(a)(30) – Elective deferral limit401(a)(31) – Direct rollover401(a)(9) – Required minimum

distributionIncidental benefit requirementAudit Issue

Current audit issue – first 3 above Now plan form requirement


Timely Payment of Elective Deferrals

Contribution amounts must be transferred to providers within a period no longer than is reasonable for proper plan administration. – 15 day example

Audit – Review operation


New Elective Deferral Requirement

401(k) Hardship suspensionEffective opportunity to make cash

or deferred electionAnti-conditioningAudit Steps

Will compare form and operation


Life Insurance

No separate life insurance contractsIncidental death and disability

permittedAudit steps

Will review contract provisions


Non-Taxable Contract Exchange

In the past – Rev. Proc. 90-24Potential changes

Transfer language must be in plan Transfer must be related to the plan

Audit Steps Will review the form & the operation


Excess Contributions – IRC 415

Old rules – did not impact contract going forward

Potential rules Must have separate account No separate account

• Contract does not qualify for exclusion in current and future years.


457(b) Eligible Plan:

Exam Issues


457(b) Exam Issues

Misunderstanding employer contribution limits & payroll taxes: Dollar limit for 2006 is $15,000 for

both employer and employee contributions

IRC 415(c) limit does not apply

(FICA applies to both types of contributions.)


457(b) Exam Issues

Final 3-year catch-up causing excesses: Counting under-utilized limit for

years before the plan existed. Using the year of retirement rather

than the 3 years before year of normal retirement age in the plan.


457(b) Exam Issues

Final 3-year catch-up causing excesses: Errors in counting prior

contributions to determine underutilized limit.• Especially years before 1/1/02 when

limits were coordinated.


457(b) Exam Issues

Multiple plan document issues: More than one normal retirement

age. Attempt to use multiple 457(b)

limits.• Contribution limits apply to the

individual.


457(b) Exam Issues

Abuse of unforeseeable emergency withdrawal rules: Attempting to apply the less

restrictive 403(b)/401(k) hardship withdrawal rules.

Not monitoring requests.


457(b) Exam Issues

Failure to monitor loan limits: Often due to multiple 457(b) plans

or 457(b) providers, or Loans in multiple plans.

• E.g., 403(b) and 457(b).

Loan limits apply to all plans of the current employer.


Violations in Non-Governmental Plans

Permitting loans Permitting rollovers Permitting the age 50+ catch-up


Exam Issues – 457(f)No substantial risk of forfeiture or

risk has expired Review Employment contacts Review of benefits handbook

Inadvertent 457(f) arrangements Review of union contracts

• Announcement 2000-1

Review of benefits handbook• Severance pay arrangements


IRC 409A and Impact On 457 Plans


Deferred Compensation Under 409A

409A added by American Jobs Creation Act of 2004

Notice 2005-1 – Guidance on scope of coverage – Q&A- 6,10,15 particularly

Notice 2005-94 –Suspends 2005 Reporting previously set out in Announcement 2004-96

• W-2 Box-12, Code Y – Report deferrals Announcement 2005-5

• W-2 Box-12, Code Z – Report income


Application of IRC 409A to IRC 457 Plans

Eligible 457(b) Plans IRC 409A does not apply – Notice 2005-1 Q&A -

3IRC 457(f) plans

IRC 409A applies when vested but 409A and 457(f) work independently

Satisfying 409A may not satisfy 457(f) – 2 ½ month rule

Grandfathered arrangements under 457 No exception for 409A


Proposed 409A Regulations Issued – 09/29/2005


Substantial Risk of Forfeiture

Same definition as 457(f)?Not necessarily a substantial risk of

forfeiture Salary reduction deferrals Rolling Risk – Unilateral extensions Covenants not to compete


Severance Pay

If valid not 457(f)/409ABut Limits;

Circumstances - Windows Dollar amounts Timing


Publications Available

4406 – Comparison Chart 403(b)/4574482 – 403(b) for Participant4483 – 403(b) for Sponsor4484 – Chart of Retirement Plans for

Tax Exempt & Governmental Entities


Visit - www.irs.gov/retirement

IRC 403(b)/ 457 Outreach Program IRS Exams of 403(b) & 457 Plans.

Documents

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employee contributions

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plan audit steps