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IRS to Focus on Audits of 403(b) and 457(b) Plans

Nov 3, 2015

The IRS Commissioner of the Tax Exempt and Governmental Entities group has announced the fiscal year 2016 (10/1/15 – 9/30/16) employee plans examination priorities.  Included in the priorities is a specialty program which will focus audit resources on Internal Revenue Code section 403(b) and 457(b) plans. 

Not-for-profit organization sponsoring section 403(b) plans and governmental organizations sponsoring section 457(b) plans should be reviewing their plans now for operational issues and consider making corrections under the available IRS programs before their plan is subject to audit in order to help avoid potential penalties being assessed by IRS.

In reviewing plans for potential operational issues, we recommend plan sponsors consider the following areas:

  • Plan Documents – Consider whether the procedures currently being practiced in regard to eligibility, compensation, contributions, etc. are following the plan document.
  • Contributions – Compare total contributions to the prior year and as a percentage of payroll. Are there any anomalies? Also consider the timeliness of contributions throughout the year. Were funds put into the plan on the “earliest date possible?”
  • Compensation – Review your plan document to determine the definition of compensation and consider whether there were any extraordinary wages paid (bonuses, etc.). Determine whether employee contributions were withheld from those extraordinary wages and whether that is appropriate based on the Plan document.
  • Eligibility – Consider employees that joined the company during the year. Were they given an opportunity to enter the plan at the appropriate time?

The years that will likely be subject to examination by the IRS will be the 2013 and 2014 plan years, so we recommend beginning your review of those plan years.

If issues arise that you think may cause operational defects in the plan, please speak to your benefits professional  for assistance in correcting the error through the IRS’ Voluntary Compliance Program.

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Peter Alwardt

Peter Alwardt is a Partner and the National Tax Leader of Employee Benefit Plans, specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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