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EP Examination Process Guide - Section 2 - Compliance Monitoring Procedures - Top Ten Issues - IRC 403(b)/457 Plans

Top ten issues identified during examinations of IRC 403(b)/457 plans.

1.  Excess IRC 402(g) contributions, including violating the 15-year rule limitations

The amount of salary reduction contributions exceeds the annual dollar limitation of $17,500 (2013 and 2014). The excess may be the result of poor internal controls or failure to aggregate deferrals made to other 403(b) or 401(k) plans. IRC 457 plans do not have to be aggregated with these other plans, but are still found to violate these limits. Violations of the 15-year catch up rule occur where the employee has exceeded the $15,000 lifetime limitation or where the employee is not employed by an eligible employer.

2.  Universal availability, IRC 403(b)(12)(A) excluding eligible employees from participation, usually part-time employees that would qualify to participate

Eligible employees are not given the right to make salary reduction contributions. Employers often misapply ERISA eligibility and coverage conditions to employees who are otherwise eligible to make salary reduction contributions under IRC Section 403((b)(12).

3.  Excess 415 contributions made

Generally, the sum of elective deferrals and employer contributions cannot exceed the lesser of $51,000 (for 2013; $52,000 for 2014) or 100% of includible compensation.

4.  Plan loans that violate IRC Section 72(p)

Common violations include: failure to make required payments when due, resulting in default of the entire loan; poor documentation; and loans from multiple vendors that in the aggregate exceed the IRC Section 72(p) limits.

5.  Hardship distribution failures (IRC Section 403(b)(11)(B))

Common violations include: inadequate documentation that the distribution is the result of a financial hardship and distributions from multiple vendors that in the aggregate exceed the amount needed to relieve the hardship.

6.  Unforeseeable Emergency Distribution (IRC Section 457(d)(1)(A)(iii))

Common violations include: inadequate documentation of the unforeseeable emergency, lack of proper internal controls, and distributions that exceed the amount needed for the unforeseeable emergency.

7.  IRC Section 457(f) plan failures in operation

IRC Section 457(f) plans that do not have any real substantial risks of forfeiture for substantial services performed. For example, a 457(f) plan that has non-compete language as one of the risks of forfeiture but in operation that is not likely to ever be applied, such as allowing for voluntary termination then adhering to a short non-compete period and collection of benefits.

8.  IRC Section 457(f) plan cafeteria-style benefits

IRC Section 457(f) plans that allow participants to chose from a number of different types of benefits with a default selection into a 457(f) plan. These types of arrangements usually do not contain a true risk of forfeiture and contain devices such as unrealistic non-compete clauses, rolling risk of forfeiture, flexi-choices and options that do not add a real risk of losing a benefit and appear to vest the benefit to the participant immediately.

9.  IRC Section 403(b) annuity contract problems

The annuity contract is outdated and has not been updated for current requirements such as for IRC Section 402(g) contribution limitations, IRC Section 401(a)(9) required distributions, and IRC Section 401(a)(31) eligible rollover requirements. Also new endorsements not being given out to all annuity contract holders.

10.  Ineligible plan sponsors of IRC Section 403(b) and IRC Section 457 plans

IRC Section 403(b) - The organization must qualify as a public educational organization or be exempt under IRC Section 501(c)(3).

IRC Section 457 - The organization must be a state or local government or a tax exempt organization under IRC Section 501(c).

Some examples of failures are of a charitable hospital with a 403(b) plan being taken over by a local government entity and not terminating the 403(b) plan and of quasi-federal government organizations adopting IRC Section 457 type plans.

Page Last Reviewed or Updated: 31-Oct-2013