IRS Releases Information About Compliance Projects

In two completed projects, the IRS found some 403(b) plans are making W-2 reporting errors, and some retirement plans were not properly vesting participants during a partial termination. The IRS is focusing on SIMPLE IRA plan eligibility.

The Internal Revenue Service has released results of two completed Employee Plans Compliance Unit (EPCU) projects and announced a new project.

The EPCU Ineligible Employer-403(b) Plans Project was designed to educate Internal Revenue Code (IRC) Section 501(c)(3) organizations whose tax-exempt status had been automatically revoked pursuant to IRC Section 6033(j) to ensure an employer eligibility failure had not occurred in the sponsoring of an IRC Section 403(b) plan.

The Project goals were to:

  • Determine if the box 12 code on Forms W-2 was correctly reported;
  • Determine whether or not the organization sponsored an IRC Section 403(b) plan;
  • Verify the sponsor eligibility for an IRC Section 403(b) plan;
  • Advise the organization on corrective actions necessary with regards to their IRC Section 403(b) plan; and
  • Educate IRC Section 403(b) sponsors regarding a written plan document.

The EPCU sent contact letters to 67 entities from the Automatic Revocation of Exemption List that also filed a 2010 Form W-2 reporting employees with IRC Section 403(b) elective deferrals.

Responses showed that the majority of the plan sponsors were educational organizations still eligible to sponsor their IRC Section 403(b) plan. However, some employers incorrectly reported IRC Section 403(b) plan deferrals in box 12 showing that the accuracy of the box 12 codes, in addition to Form 990 filing, is still a concern.

More information is here

NEXT: Partial Termination/Partial Vesting Project

In its Partial Termination/Partial Vesting Project, the EPCU contacted Form 5500 return filers that reported a decrease in plan participants and had participants that were not 100% vested and were terminated from employment. The contact made was to determine if the plan experienced a partial termination. If a partial termination did occur, the goal of this project was to determine whether plan administrators were complying with the vesting requirements of IRC Section 411(d)(3).

Over a span of three years, nearly 2,000 letters were sent. Approximately half of the contacts were due to errors on the Form 5500 return. In many of these cases, the plan sponsors amended their returns and corrected the errors. Taxpayers made errors in participant counts.

Also, a significant number of plans had fully vested all their participants as a result of a partial termination but it was indicated on their Form 5500 that there were participants who were not fully vested.

The plan administrators misinterpreted the Form 5500. They counted eligible participants who chose not to participate in their 401(k) plan as not being fully vested. Some plans did not experience a partial termination because account balances were transferred to another plan but failed to indicate on Form 5500 Schedule H that the assets were in fact transferred to another plan.

Approximately 30% of the cases were closed as “no change” cases. In almost 10% of the cases, it was determined during the compliance check that a partial termination had occurred and affected participants had not been fully vested.

More information about the results of this project is here

NEXT: A new compliance project

The ECPU is undergoing a SIMPLE IRA Plans - Eligible Sponsors Project. The information it has indicates some entities sponsor a SIMPLE IRA plan, but appear to employ more than 100 employees who earn at least $5,000. The goal of the project is to ensure that employers sponsoring a SIMPLE IRA plan are eligible to sponsor those plans.

Code section 408 allows employees and employers to contribute to traditional IRAs set up for employees’ own retirement savings. Employees may choose to make salary reduction contributions and the employer is required to make either matching or non-elective contributions.

An “eligible employer” means an employer which had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding year. An eligible employer who establishes and maintains a plan under this subsection for one or more years and who fails to be an eligible employer for any subsequent year shall be treated as an eligible employer for the two years following the last year the employer was an eligible employer.

More information is here.