Employee Plans Compliance Unit (EPCU) - Current Project - 403(b) Universal Availability Higher Education
This project focuses on higher education organizations sponsoring Internal Revenue Code (Code) section 403(b) plans and their satisfaction of Universal Availability (UA) non-discrimination rules and new plan document requirements. The project builds upon a similarly focused 403(b) pilot project involving K-12 public schools. For purposes of this project, higher education organizations refers to academies, universities, colleges, seminaries, institutes of technology, and other collegiate level organizations, such as vocational and trade schools that award academic degrees or professional certifications.
Enacted in 1958, Code section 403(b) provides public school and other non-profit employers the ability to sponsor employee retirement savings on a tax deferred basis. 403(b) plans that include employee elective salary deferrals must satisfy a UA rule that demonstrates salary deferrals, including after tax Roth deferrals, don’t discriminate in favor of highly compensated employees. The UA rule provides that if any employee is permitted to make elective salary deferrals to a 403(b) plan, then all employees, with limited optional exclusions, must be provided the same opportunity. There are two aspects of UA, “eligibility” and “effective opportunity”. Eligibility involves determining which employees are allowed to defer salary. Effective opportunity concerns an eligible employee’s practical ability to participate. Final 403(b) regulations, enacted in 2007, and effective in 2009, clarify application of the UA rule and eliminate certain good faith safe harbor exclusions available since 1989. Failure to satisfy UA is a recurring issue in IRS 403(b) plan audits and has consistently landed high on the list of top ten operational deficiencies discovered by the IRS.
Another key provision of the final regulations is a new written plan requirement. The written plan requires employers, some for the first time, to formalize their 403(b) plan terms and specify how statutory and regulatory requirements will be met. Failure to satisfy the UA rule and written plan requirement could result in the loss of valuable tax benefits to employees and jeopardize retirement savings for an employer’s entire 403(b) plan. This project will give higher education organizations the chance to identify problems with their plans and to correct them on their own.
The content of this project is the result of a collaboration among various areas of the IRS including the Tax Exempt and Government Entity (TE/GE) Office of Research and Analysis and TE/GE 403(b)/457 Compliance Planning Group. EPCU will mail the compliance contact letter and information request package to a random national sample of over 300 large, medium, and small public and private higher education organizations sponsoring 403(b) plans. The information request package includes a 21 question Form 886-A “Explanation of Items”, Instructions for completing and returning, and a Glossary of commonly used terms. The sponsoring organization will be asked to complete Form 886-A for the 2010 calendar year and return to the Internal Revenue Service by fax, postal mail, or e-mail, as described in the instructions and cover letter. Also included in the package will be “403(b) Plan Informational Attachment #1” describing new plan document requirements and the coordination of employee catch-up deferrals. Responses will be evaluated and a determination made as to whether the plan appears to be compliant. If the sponsoring organization appears compliant, the contact will be resolved, and a closing letter will be issued notifying the sponsoring organization. If the response is unclear, additional clarifying information may be requested. If a potential problem is identified, the IRS will correspond with the sponsoring organization to help it analyze its 403(b) plan to determine if it’s in noncompliance. If the sponsoring organization finds a problem, they should use one of the correction methods outlined in the IRS follow-up letter. Correction for UA includes providing each eligible employee the opportunity for current and future year participation and employer funded fully vested contribution to restore the lost opportunity of tax deferred savings for each prior year or portion of a year otherwise eligible employees were excluded.
The information gathered from this project will ultimately result in a report issued by the IRS describing responses and identifying areas where additional 403(b) education, guidance, and outreach is needed and how we can focus enforcement efforts to address and/or avoid non-compliance in UA and new plan document requirements for organizations involved in higher education.
If You Receive A Letter
Ensure the request is routed to the office or department with primary responsibility for the day to day administration of your employee benefit programs. Please complete Form 886-A Explanation of Items as completely and accurately as possible and return to the person listed in the contact letter using one of the three response options listed in the instructions. You may also furnish any other documents or clarifying material that you believe will be helpful to us for review. If you need additional time, please contact the person whose name is listed on the cover letter to request an extension before the response due date. Possible defects need to be discovered now when sanction relief is available to sampled higher education organizations that timely correct. Failure to provide the information requested could result in further action or examination of your plan.
If You Have Questions
Please feel free to contact person listed in the cover letter or email questions about this project and how it relates to your situation. Please indicate “403(b) Universal Availability Higher Education” in the Subject line of your message.
- Form 2848 (Instructions), Power of Attorney and Declaration of Representative
- Letter 1562-X, 403(b) Cover Letter 403(b) Higher Education
- Form 886-A, 403(b) Compliance Check Higher Education
- Instructions, 403(b) Compliance Check Higher Education
- Glossary of Commonly Used Terms
- Final Regulations 403(b)
- Publication 571, Tax Sheltered Annuity (403(b)) Plans)
- Publication 4546, 403(b) Plan Checklist