Higher Ed. Compliance Check Finds Retirement Plan Issues

July 8, 2013 (PLANPSONSOR.com) - On May 2, 2013, the Internal Revenue Service’s (IRS’s) Exempt Organizations division released its Colleges and Universities Compliance Project Final Report.

As one of two IRS divisions that audits colleges and universities (the other, Employee Plans, focuses on benefit plans), Exempt Organizations provided some unique insight into the type of issues that a general audit of a higher education institution is likely to investigate. Although these audits did not focus on benefits-related issues, several such matters did emerge in the investigations.

Thirty-four of the organizations to which questionnaires were sent (8.5%) were targeted for audit, because their responses were a) sufficiently incomplete, or b) when combined with the organization’s annual tax return (Form 990), revealed potential issues with executive compensation or unrelated business taxable income (UBTI). It is important to note that benefit programs were not criteria for audit targeting, but that benefits information for some institutions was later reviewed by investigators as part of the audit process.

Though the investigators only examined retirement plans at only about one-quarter of the institutions audited, several compliance issues were discovered in about half of the institutions examined. These issues included:

• Deferrals in excess of the 402(g) limit

• Total contribution in excess of the 415 limit

• Loans that exceeded the borrowing limits under 72(p)

• 457(f) plans with no substantial risk of forfeiture, resulting in current taxation of contributions to such plans


The IRS found several instances of compensation in excess of what is defined as reasonable at private universities under Section 4958 of the Code. (Public universities are exempt from this requirement.) Such excess compensation is subject to excise tax to the institution in question. The primary reason that such compensation was identified was improper benchmarking of the compensation amounts (e.g., data used that was not truly comparable).

Compensation of other individuals, who were not part of the key executive group at college and universities, was reviewed as well. Not surprisingly, the IRS reported that compensation of head coaches and investment managers often greatly exceeded salaries of the president of the college/university and other key management employees.

In addition, various errors in the completion of employment tax returns resulted in the underreporting of wages to the IRS, which required adjustment for additional income tax withholding.

The IRS investigators discovered that colleges and universities should have reported more UBTI than they actually did, which had resulted in less taxable income and thus, less taxes paid. Most underreported taxable income was related to the following areas:

• Fitness, recreation centers and sports camps

• Advertising

• Facility rentals

• Arenas

• Golf


The primary reasons for underreporting were:

• Institutions reported losses for activities that lost money year after year, so that they could not qualify as a trade or business with a sufficient profit motive, whereby a loss could offset taxable income

• Reporting losses were unrelated to any business activity that generated taxable income (The loss must be directly attributable to the business activity)


The project dates back to 2008, when detailed compliance questionnaires were sent to 400 colleges and universities, selected at random. The full report is a must-read for anyone involved in this field, particularly finance officials who put together the information for the annual tax returns.

Colleges and universities should be aware that some areas, especially UBTI and executive compensation for private universities, are subject to particular scrutiny by the IRS. Finally, those who work with retirement plans should take nothing for granted; audits continue to uncover errors that may be as simple as a violation of 402(g) elective deferral limits.


-Michael A. Webb, AIF, CEBS, vice president, Retirement Services, Cammack LaRhette Consulting 


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.