Surviving the IRS’ Higher Ed 403(b) Compliance Check

April 29, 2011 (PLANSPONSOR (b)lines) - In 2006, the IRS launched its first 403(b) Compliance Check initiative, focusing on whether public K-12 school districts were extending participation to all employees they identified as “eligible” to contribute to the 403(b) plan.

Now, starting in April 2011, the IRS is expanding its 403(b) Compliance Check initiative to the higher education community by randomly selecting 300 public and private higher education institutions to demonstrate participant eligibility compliance both in operation and in accordance with the terms of the written plan (see IRS Starts Higher Ed 403(b) Compliance Check).    

If you are among one of the chosen higher education 403(b) sponsors, what should you be expecting?   While the IRS cover letter notes that the Compliance Check is not an IRS audit, failure to respond to the Compliance Check could result in the IRS referring its auditors to examine the sponsor’s 403(b) plan.    

Learning the Ground Rules  

Be aware of potential compliance pitfalls to respond successfully to the Compliance Check.  Your responses should keep in mind that:  

  • The questions only pertain to employees, not to independent contractors or leased employees. 
  • The Compliance Check focuses solely on voluntary contributions to 403(b) plans.  Any mandatory employee contributions or employer contributions to your 403(b) plan are outside of the scope of this questionnaire.  
  • If an employer sponsors more than one 403(b) plan for different groups of employees, the employer should consider these plans collectively as a single 403(b) plan when completing the Compliance Check. 
  • If a public higher education institution’s 403(b) plan covers employees of more than one state entity (for example, a state university system) with a common payroll, the Compliance Check responses should take into account all employees of these related entities. 
  • If a private higher education institution’s 403(b) plan covers employees of more than one 501(c)(3) organization, Compliance Check responses should take into account only the employees of the employer identified by the IRS in the cover letter. 


Preparing Your Responses   

The questions asked in Compliance Check pertain to four themes:  

1. When can an employee make pre-tax deferrals (Questions 1-7) or Roth 403(b) contributions (Questions 8-12) to the 403(b) plan?   

These questions seek to validate that your employees may choose to either voluntarily contribute to the 403(b) plan (either via a pretax deferral or a Roth 403(b) contribution) or receive the amounts as cash compensation.  To be considered a voluntary contribution: 

  • The minimum annual contribution can be no more than $200; 
  • Employees who normally work at least 20 hours/week (i.e., at least 1,000 hours annually) must be given the opportunity to contribute to the 403(b) plan; 
  • The employer must provide meaningful notice at least annually to all eligible employees (whether or not currently participating in the 403(b) plan) of the opportunity to contribute and to change current contribution elections to the 403(b) plan.  

2. Does the 403(b) plan allow residents who have graduated from a medical school and are now at a teaching hospital are permitted to participate in the 403(b) plan?  (Questions 13-14)  

Most medical residents presumably perform at least 1,000 hours of service annually.  These questions are designed to confirm that such employees are also given the opportunity to contribute to the 403(b) plan.   

3. Does an employee's ability to contribute to the 403(b) plan depend on whether he is considered faculty or not?  (Questions 15-18)  

These questions focus upon whether the 403(b) plan is available to all eligible employees, as defined by the IRS 403(b) regulations.  The permissible exceptions to this IRS rule (which, if used, must also be part of the written plan document) are:   

  • Nonresident aliens with no U.S. source income; 
  • Certain student employees (which may occur if the employer is a higher education institution); 
  • Employees who participate in another 403(b), 401(k), or (if the employer is a governmental entity) 457 deferred compensation plan of that employer; or 
  • Employees who normally work less than 20 hours per week. 


If your 403(b) plan is not available to a category of employees listed in Question 16 or 18, your explanation should take into account one of these exceptions.  For example, you may have two 403(b) plans – one for faculty and one for non-faculty employees or separate plans for union and non-union employees.  If your 403(b) plan does not cover student assistants or other part-timers, make sure that their annual service is less than 1,000 hours.  

4. Was the written 403(b) plan timely adopted and does it identify any employee classification(s) that are not eligible to contribute?   (Questions 19-21) 

These questions are seeking confirmation that a written plan, reflecting the requirements of the IRS 403(b) regulations, was timely adopted in 2009 and that operational practices governing employee eligibility are consistent with the terms of the 403(b) plan document.  

What to Expect After Submitting the Compliance Check   

Based on their evaluation of the submitted completed Compliance Check, you will receive one of 3 possible IRS responses: 

  • A closing letter indicating resolution of the Compliance Check if your submission appears compliant; 
  • A request for additional information if certain answers in the Compliance Check appear unclear; 
  • IRS correspondence to help analyze the 403(b) plan if the employer’s submission identifies a potential compliance issue.  A plan ultimately found to be noncompliant will receive an IRS follow-up letter indicating means of correcting this issue. 


Remembering Your Safety Net  

So, what should you do if your higher education institution receives a Compliance Check from the IRS?  Most importantly, proceed with caution.  Make sure that the employee completing the Compliance Check understands the IRS terminology and its application to your 403(b) plan’s operations.  Coordinate with your plan’s legal counsel in preparing responses to the Compliance Check.  If you have not received a Compliance Check yet, use this time to get your 403(b) plan in order now.  The cost of “wait and see” is too high. 


Linda Segal Blinn, J.D., is Vice President of Technical Services for ING’s U.S. Retirement Services. In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans.  A contributing author to several publications, Blinn also speaks frequently at industry associations meetings on retirement plan issues facing K-12 schools, higher educational institutions, and nonprofit entities. 


(This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.  These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document.  The taxpayer should seek advice from an independent tax adviser.)