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IRS to Conduct Compliance Checks of Nongovernmental 457(b) Plans

The Internal Revenue Service (IRS) has announced a new compliance check program for nongovernmental Internal Revenue Code section 457(b) plans. Tax exempt organizations such as 501(c)(3) charitable organizations, hospitals, and educational institutions typically sponsor these plans for a select group of management or highly compensated employees to allow them to defer additional compensation over and above what they can contribute to a 403(b) or 401(k) plan.

Compliance Checks

The IRS has indicated that it does not currently have sufficient information to determine the level of compliance of these plans and expects to send compliance checks to about 200 sponsors of 457(b) plans (excluding church plans).  Those plans selected will have been identified through their Form 990 filing, which discloses that an organization maintains such a plan.

The IRS expects to find problems such as improper funding of the plan, providing loans, improper catch-up contributions, and plan sponsor eligibility (meaning lack thereof).  It has also stated that the compliance checks will not be an audit, exam, or investigation, but will be similar to other IRS compliance checks such as those of section 403(b) universal eligibility and section 403(b) plans of colleges and universities.

Conclusion

Numerous not-for-profit organizations have adopted section 457(b) plans in the past 10 years for their executives.  Many of these organizations have received inadequate advice regarding the regulations covering the operation of these plans and as a result may have executives with significant tax exposure if the plans have been operated improperly.  We recommend that organizations with 457(b) plans that have not conducted a simple operational review of their plans conduct one soon in anticipation of increased IRS enforcement in the area of executive retirement plans.

Peter Alwardt is a Tax Partner 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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