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EPCU Completed Projects Projects with Summary Reports Invalid 501(c)(18) Deferral Project Report

Invalid 501(c)(18) Deferral Project

The project verified that employers who reported elective deferrals coded with “H” in box 12 of Form W-2 had employees participating in a plan described in Code Section 501(c)(18).

The EPCU selected employers who filed Forms W-2 with these deferrals indicated, and also contacted all 8 Section 501(c)(18) entities contained in IRS records in 2009. After an initial phase using 2006 data, the EPCU selected approximately 1400 employers from 2007 and 2008; the initial phase revealed that all valid deferrals to such a plan were associated with the printing trades, and these entities were, to the extent possible, excluded.

The EPCU contacted 891 employers to validate their Form W-2 information. When the deferrals were reported correctly, no further action was taken, and the cases were closed without change. When the coding was incorrect, taxpayers were advised of the proper codes to be used. In general, taxpayers were not required to correct prior filings because of this error but were advised to properly code items listed in box 12 of Form W-2 in future filings.

The Results

The EPCU found that there is only one valid IRC501(c)(18) plan in existence. Due to exclusions, of the 891 employers contacted in the project, only 50 - less than 6% - actually had employee contributions to the IRC Section 501(c)(18) plan. Most employers (60%) incorrectly used code H in Box 12 of Form W-2; the EPCU received various reasons for these errors. There were numerous processing errors as well.

IRC 501(c)(18) Project
Results Table
Referrals to EP Exam 2 0.22%
Unable to Locate 6 0.67%
501(c)(18) Plan Participating Employers 50 5.61%
Others (non-responders) 77 8.64%
W-2 Processing Errors 225 25.25%
Taxpayer Errors 531 59.60%
Totals 891 100.00%
Taxpayer Error Details % of 531 % of 891
401(k) Plans 32 6.03% 3.59%
403(b)/457 Plans 63 11.86% 7.07%
Charitable Deductions 26 4.90% 2.92%
Non-Pension Benefits 157 29.57% 17.62%
SIMPLE 401(k), SIMPLE IRA/SEP 50 9.42% 5.61%
Software/Computer Errors 29 5.46% 3.25%
State/Local Government Plans 39 7.34% 4.38%
Other ** 135 25.42% 15.15%
Totals 531 100.00% 59.60%

**Other includes miscoded:

414(h)(2) Pick-up
Bonuses
Church Plans
Investment Accounts
Individual Retirement Accounts
Judicial Accounts
Multiemployer Plans
Other Plans - Unidentified
Payroll Company Errors
Sick Pay
Transportation Subsidies

Background

IRC Section 501(c)(18) exempts from income tax pension trusts created before June 25, 1959, which provide for payments of benefits under a pension plan funded by employee contributions, if the trust meets certain requirements:

  1. It is a valid, existing trust under local law, evidenced by an executed written document.
  2. It is part of a plan that provides that the corpus or income cannot be used for any purpose other than providing benefits under the plan.
  3. The plan benefits cannot in form or operation discriminate in favor of highly compensated employees.
  4. If the plan allows for (income tax) deductible contributions:
    • contributions are limited to the allowable deduction amount:
      1. the lesser of $7,000 or
      2. 25 percent of the individual's gross income for the tax year,

    • actual deferral percentage for eligible highly compensated employees must be met with respect to elective contributions,
    • contributions are treated as elective deferrals for purposes of the exclusion limit for elective deferrals, but not to the increased limit for contributions under annuity contracts purchased by a charitable, religious, scientific, etc. organization or public school, and
    • the limitation on elective deferrals requirement of a qualified pension, profit-sharing and stock bonus trust are met.

  5. The benefits of the related plan are determined objectively. The plan may provide similarly situated employees with differing benefits but the benefit formula cannot be discretionary.
  6. Changes in the trust that may have occurred since its creation must not have been fundamental changes in the character of the trust or changed the beneficiaries. Adding beneficiaries by the addition of employees in the same or related industries, either individuals or groups, such as union locals, is in general not a fundamental change in the character of a trust. The merger of a trust created after June 25, 1959, into a trust created before that time is also not in itself a fundamental change in the character of the exempt trust if both trusts benefit employees of the same or related industries.
Page Last Reviewed or Updated: 02-Apr-2014