The first stage in the IRS initiative came in June 2007, when the IRS launched an outreach project aimed at ensuring that school districts across the country are complying with the universal availability requirement. Roughly a month later, the IRS released the final 403(b) regulations, giving plans and plan sponsors until the beginning of next year to comply with new document and operational rules. Since then, the IRS has made a major push to educate the 403(b) community on the new requirements, holding seminars, participating in Webcasts, publishing explanatory newsletters and posting large amounts of material on the IRS website ( www.irs.gov ). It’s no accident that most of these materials are posted in a section labeled “Examinations/Enforcement.”
The June 2007 outreach project wasn’t an audit program per se, but it reflects an increased focus by the IRS on compliance in both the governmental and tax-exempt 403(b) arena – a focus that will only increase over the next several years. IRS officials have indicated both formally and informally that they will be auditing 403(b) plans more than ever before.
In the past, 403(b) plans have operated in relative obscurity, with little oversight and less publicity. But with the buzz surrounding the new regulations, financial advisers and plan providers are seeing greater opportunities – and the IRS is seeing a greater need to audit for compliance to ensure that employees are receiving the benefits they are supposed to get from these arrangements.
To adjust to the changes, 403(b) sponsors should consider a “self-audit” of their plans – before the IRS knocks on their door. Law firms and consultants can perform these audits and enable 403(b) sponsors to correct any defects and to establish compliant procedures and documents under the new rules.
IRS officials have indicated both formally and informally that they will be auditing 403(b) plans more than ever before. Compliance is the key.
What will they be looking for? Here is a list of key audit issues:
1. Written plan: Is there a document or collection of documents that address all of the requirements of the regulation? For ERISA governed 403(b) plans (e.g., tax exempts and private schools and colleges that make plan sponsor contributions), take heed: your document needs to comply with these rules, in addition to the provisions of ERISA.
2. Excess employee deferrals: Do deferrals exceed the current limit ($15,500 for 2008)? The IRS will be looking to test internal controls for monitoring and limiting the deferrals, especially aggregation with other 403(b) or 401(k) plans.
3. Universal availability: Are all eligible employees being given the right to participate, AND are they getting adequate notice of that right as required by the regulation?
4. Excess contributions: Are individual employees receiving too much under the plan (the current overall limit, including both deferrals and plan sponsor contributions, is $46,000)?
5. Plan loans violations: Have participants made required loan repayments when due? Are loans properly documented? Do participants have loans from multiple vendors that in the aggregate exceed the IRC §72(p) limits?
6. Hardship distribution failures: Is there documentation that the distribution is the result of a financial hardship? Do distributions from multiple providers in the aggregate exceed the amount needed to relieve the hardship?
7. Annuity contract problems: Is the current form of contract (or endorsement to existing contracts) outdated, failing to address current requirements such as deferral limits, required distributions and eligible rollover requirements?
8. Transfer and exchange issues: Are transfers and exchanges being handled in the manner required by the regulation? Are information sharing agreements in place?
9. Plan sponsor eligibility: Is the plan sponsor eligible to sponsor a 403(b) plan - i.e., is it a public educational organization or exempt from tax under IRC §501(c)(3)?
- Bruce Ashton, Reish Luftman Reicher & Cohen