The initiative will involve contacts with a random sampling of more than 300 institutions of varying sizes across the country.
“Universal availability” is the rule applicable to 403(b) elective deferral features in plans sponsored by employers other than those churches satisfying the requirements of Code Section 3121(w) (generally, encompassing only the churches, synagogues, mosques, etc., as well as certain qualified church-controlled organizations). Although the Code does not require any employer to offer employees an opportunity to defer to a 403(b) plan, if they do so, the universal availability rule generally requires that they make that right available to all employees who are not properly excludible under the rules. Moreover, some of the permitted exclusions are “all or nothing”, meaning that either the entire group is either included or excluded. The IRS compliance initiative seeks to verify compliance with the universal availability rule, or alternatively, to identify areas of potential noncompliance and seek corrective action.
Higher education institutions that receive the IRS communication will be required to complete a six page compliance questionnaire, described as a Compliance Check, which consists of 21 questions. Some of the questions may be disregarded if they do not apply.
Plan sponsors will want to involve their counsel in the preparation of responses to the questionnaire in the same way that they would do with any material regulatory inquiry. And, they will want to be sure that responses are complete and accurate, which means making sure to review relevant documents and files and talk to all of the individuals who work on these matters. If a plan sponsor maintains multiple 403(b) plans, the separate instruction sheet indicates that they should report them on the questionnaire as a single plan.A few of the questions posed in the compliance check may merit some further explanation or clarification.
- In Q4, the IRS is looking for an annual minimum – not a per-payroll minimum.
- For purposes of Q6, 7, 11 and 12: The plan sponsor will want to take into account all relevant communications from investment providers, and from a third party administrator where applicable, in addition to communications directly from the plan sponsor.
- In responding to Q9, the plan sponsor will want to remember that the right to elect post-tax Roth 403(b) deferrals is generally subject to the same universal availability requirements applicable to pre-tax elective deferrals.
- Q13 and 14 present some important questions for the plan sponsor to review, regarding medical residents:
- whether medical residents are more properly considered students or employees; if they are employees,
- whether they are permitted to defer or are excluded; and, if they are excluded employees,
- whether that exclusion is proper under the universal availability rules.
- Similarly, Q 15 and 16 present some important questions regarding faculty: There is no general permissive exclusion for faculty. However, certain groups of faculty may be more likely to fit within one or more of the permissively excluded categories of employees (ex: those that work (or are expected to work) less than 1000 hours in a year). It is always important to verify that any exclusions are consistent with the relevant rules. An exclusion based on the 1000 hour rule requires tracking of hours to verify compliance, or another suitable determination based upon full-time equivalence.
- As with medical residents and faculty, Q 17 and 18 present important questions regarding support staff: As with faculty, there is no general permissive exclusion for support staff. It is important to verify that individuals or groups of employees who are excluded fit within one or more of the permissively excluded groups. Also, an exclusion based on the 1000 hour rule requires tracking of hours to verify compliance, or another suitable determination based upon full-time equivalence.
- Questions about the employer’s written plan, in Q 19, 20 and 21: Under the final 403(b) regulations, a plan sponsor generally may satisfy the written plan requirement with a single plan document or with a collection of documents which together satisfy all of the requirements with respect to the content of a written plan (a “paper clip” approach). Even plans using a single plan document are likely to have additional documents that constitute part of the written plans; these can include salary reduction agreements; underlying investment arrangements; plan procedures; etc… Thus, as a practical matter many plans utilize some measure of the paper clip approach, even if they do not realize it, and even if they have a central document. Also, many public universities maintain one or more 403(b) plans for which the rules are set forth in statutes and/or regulations. These statutes and regulations may be supplemented by a separate plan document, or they may constitute a written plan document. In either case, those plan sponsors are likely to be relying upon the paper clip approach as well. Identifying the proper documents is an important step for determining whether the terms of the plan are being followed and whether they are consistent with the responses to other questions on the questionnaire.
If the IRS determines that a plan has improperly excluded employees from the right to make elective deferrals, the necessary correction described in the instructions is to make a corrective contribution to the accounts of affected participants (plus earnings). Of course, any plan or administrative defects giving rise to the improper exclusions also would need to be corrected.
The questionnaire may be completed on paper or in a fillable-form PDF, and may be submitted by mail, fax, or e-mail, as more specifically described in the instructions.
Richard Turner serves as Vice President and Deputy General Counsel at VALIC. He was recently appointed to the U.S. Department of Labor ERISA Advisory Council and is a contributing author of the “403(b) Answer Book.”