irc 403(b)/ 457 outreach program irs exams of 403(b) & 457 plans
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IRC 403(b)/ 457 Outreach Program
IRS Exams of 403(b) & 457 Plans
IRC 403(b)/457 Outreach Program
Contact Information
Robert J. ArchitectTEGE
Washington, DC202-283-9634
IRC 403(b)/457 Outreach Program
Current Exam Issues – 403(b)
Ineligible EmployerExcess Elective Deferral contributions
Review of payroll records & HR records & W-2Universal availability
Review of payroll records and HR recordsPlan Loans violate IRC 72(p)
Review of account records & 1099-RImpermissible distributions-bad hardships
Review of account records & HR records & 1099-R
Contract provisions Review of contract
IRC 403(b)/457 Outreach Program
5 Year Post-Severance Contributions
No CODA must be employer contributions
Audit steps Will review plan Will review employment contracts Will review all documents for any cash
options Will review for guaranteed payouts upon
death
IRC 403(b)/457 Outreach Program
Sick & Vacation Pay Issues
Sick & Vacation Payments Avoiding constructive receipt Payroll records; Benefits Handbook;
Union Contracts
Elective Deferrals to 403(b), 457(b), or 401(k) – Timing 415 regulations
IRC 403(b)/457 Outreach Program
Sick & Vacation Pay Issues (cont)
Contributions to 401(a) plan If have cash option – Impermissible CODA -
GovernmentalContributions to 403(b)If subject to a cash option
treated as elective deferral and not eligible for special 5 year post-retirement contributions
Converting to employer contributions Attempts to avoid FICA Seek expert advice – many pitfalls
IRC 403(b)/ 457 Outreach Program
How 403(b) Regulations may impact exams –Based on
Current content of proposed regulations- Caution (a work in
progress)
IRC 403(b)/457 Outreach Program
Plan In Form & Operation
Must be maintained pursuant to a written DC plan
Both form and operation Future timely amendments
Audit Steps Will review plan provisions for form
and compare to plan operation
IRC 403(b)/457 Outreach Program
Universal Availability – 20 hour requirement
ER must reasonably expect employee to work < 1000 hours for ensuing 12-month period
Subsequent plan year or 12-month period the employee actually worked < 1000 hours in the preceding 12-month period
Audit steps – Must track hours
IRC 403(b)/457 Outreach Program
Universal Availability (cont)
Permissive exclusions - not allowed
• Collective bargaining employees• Visiting professors• Employees who have taken a vow of
poverty• Employee with a one-time election to
participate in a governmental non-403(b) plan
IRC 403(b)/457 Outreach Program
Form Requirements -Contract
401(g) – Transferability of annuities401(a)(30) – Elective deferral limit401(a)(31) – Direct rollover401(a)(9) – Required minimum
distributionIncidental benefit requirementAudit Issue
Current audit issue – first 3 above Now plan form requirement
IRC 403(b)/457 Outreach Program
Timely Payment of Elective Deferrals
Contribution amounts must be transferred to providers within a period no longer than is reasonable for proper plan administration. – 15 day example
Audit – Review operation
IRC 403(b)/457 Outreach Program
New Elective Deferral Requirement
401(k) Hardship suspensionEffective opportunity to make cash
or deferred electionAnti-conditioningAudit Steps
Will compare form and operation
IRC 403(b)/457 Outreach Program
Life Insurance
No separate life insurance contractsIncidental death and disability
permittedAudit steps
Will review contract provisions
IRC 403(b)/457 Outreach Program
Non-Taxable Contract Exchange
In the past – Rev. Proc. 90-24Potential changes
Transfer language must be in plan Transfer must be related to the plan
Audit Steps Will review the form & the operation
IRC 403(b)/457 Outreach Program
Excess Contributions – IRC 415
Old rules – did not impact contract going forward
Potential rules Must have separate account No separate account
• Contract does not qualify for exclusion in current and future years.
IRC 403(b)/457 Outreach Program
457(b) Eligible Plan:
Exam Issues
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Misunderstanding employer contribution limits & payroll taxes: Dollar limit for 2006 is $15,000 for
both employer and employee contributions
IRC 415(c) limit does not apply
(FICA applies to both types of contributions.)
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Final 3-year catch-up causing excesses: Counting under-utilized limit for
years before the plan existed. Using the year of retirement rather
than the 3 years before year of normal retirement age in the plan.
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Final 3-year catch-up causing excesses: Errors in counting prior
contributions to determine underutilized limit.• Especially years before 1/1/02 when
limits were coordinated.
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Multiple plan document issues: More than one normal retirement
age. Attempt to use multiple 457(b)
limits.• Contribution limits apply to the
individual.
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Abuse of unforeseeable emergency withdrawal rules: Attempting to apply the less
restrictive 403(b)/401(k) hardship withdrawal rules.
Not monitoring requests.
IRC 403(b)/457 Outreach Program
457(b) Exam Issues
Failure to monitor loan limits: Often due to multiple 457(b) plans
or 457(b) providers, or Loans in multiple plans.
• E.g., 403(b) and 457(b).
Loan limits apply to all plans of the current employer.
IRC 403(b)/457 Outreach Program
Violations in Non-Governmental Plans
Permitting loans Permitting rollovers Permitting the age 50+ catch-up
IRC 403(b)/457 Outreach Program
Exam Issues – 457(f)No substantial risk of forfeiture or
risk has expired Review Employment contacts Review of benefits handbook
Inadvertent 457(f) arrangements Review of union contracts
• Announcement 2000-1
Review of benefits handbook• Severance pay arrangements
IRC 403(b)/457 Outreach Program
IRC 409A and Impact On 457 Plans
IRC 403(b)/457 Outreach Program
Deferred Compensation Under 409A
409A added by American Jobs Creation Act of 2004
Notice 2005-1 – Guidance on scope of coverage – Q&A- 6,10,15 particularly
Notice 2005-94 –Suspends 2005 Reporting previously set out in Announcement 2004-96
• W-2 Box-12, Code Y – Report deferrals Announcement 2005-5
• W-2 Box-12, Code Z – Report income
IRC 403(b)/457 Outreach Program
Application of IRC 409A to IRC 457 Plans
Eligible 457(b) Plans IRC 409A does not apply – Notice 2005-1 Q&A -
3IRC 457(f) plans
IRC 409A applies when vested but 409A and 457(f) work independently
Satisfying 409A may not satisfy 457(f) – 2 ½ month rule
Grandfathered arrangements under 457 No exception for 409A
IRC 403(b)/457 Outreach Program
Proposed 409A Regulations Issued – 09/29/2005
IRC 403(b)/457 Outreach Program
Substantial Risk of Forfeiture
Same definition as 457(f)?Not necessarily a substantial risk of
forfeiture Salary reduction deferrals Rolling Risk – Unilateral extensions Covenants not to compete
IRC 403(b)/457 Outreach Program
Severance Pay
If valid not 457(f)/409ABut Limits;
Circumstances - Windows Dollar amounts Timing
IRC 403(b)/457 Outreach Program
Publications Available
4406 – Comparison Chart 403(b)/4574482 – 403(b) for Participant4483 – 403(b) for Sponsor4484 – Chart of Retirement Plans for
Tax Exempt & Governmental Entities
IRC 403(b)/457 Outreach Program
Visit - www.irs.gov/retirement