4.72.13  403(b) Plans (Cont. 1)

4.72.13.11 
Contribution Limitations

4.72.13.11.1  (11-12-2014)
Salary Reduction Contributions other than Elective Deferrals

  1. Elective deferrals under an IRC 403(b) plan are employer contributions which are used to purchase an annuity contract (or made to a custodial account) under a salary reduction agreement. See Treas. Reg. 1.403(b)-2(b)(7); IRC 402(g)(3).

  2. Elective deferrals do not include:

    1. Salary reduction contributions made pursuant to a one-time irrevocable election that is made when an employee is initially eligible to participate in the salary reduction agreement (See Treas. Reg. 1.402(g)-1(c)(1)), or

    2. Pre-tax contributions made as a condition of employment (See Treas. Reg. 1.402(g)(3)-1).

  3. If a participant has the right or ability to terminate or modify an election, the contributions are elective deferrals even if the participant never exercises this right.

    Example 10: Employee X participates in an IRC 403(b) plan (Plan). In order to receive employer contributions under the Plan, Employee X is required to elect to defer three percent of salary in the form of mandatory contributions. Employee X has the option of revoking this election at any time, although Employee X never terminates his election. The mandatory contributions are elective deferrals because the election is revocable. These contributions are therefore included in applying the IRC 402(g) limit. They are also subject to FICA (if applicable).

    Example 11: Assume the same facts as in Example 10, except that the Plan further provides that an election to terminate participation in the Plan is irrevocable. Thus, an employee who terminates his election will be permanently excluded from participating in the Plan. Even so, since the election to participate is revocable, the mandatory contributions are elective deferrals under IRC 402(g). The contributions are subject to FICA (if applicable).

    Note:

    Example 11 points out that if an employee may terminate his election to participate in a plan, the election is not considered to be irrevocable. Irrevocability relates to the election to participate rather than an election to terminate participation in a plan.

4.72.13.11.2  (11-12-2014)
402(g) Elective Deferral Limits

  1. Elective deferrals under an IRC 403(b) plan are subject to the limitation under IRC 402(g).

  2. For purposes of IRC 403(b), an elective deferral is any contribution that arises because of an employee's election between current cash compensation or deferral under the plan. See Treas. Reg. 1.403(b)-2(b)(7), IRC 402(g)(3),, IRC 3121(a)(5)(D) and Treas. Reg. 31.3121(a)(5)-2(a).

  3. An elective deferral is any elective contribution by a participant made to the following types of plans:

    1. Qualified CODA

    2. Salary reduction simplified employee pension plan

    3. IRC 403(b) plan

    4. SIMPLE plan

      Note:

      See IRC 402(g)(3).

  4. Elective deferrals, one-time elections made at the time of initial eligibility, and mandatory contributions as condition of employment are subject to FICA. See IRC 3121(a)(5)(D) and Treas. Reg. 31.3121(a)(5)-2.

  5. The IRC 402(g) limit on participant contributions applies to all the elective deferrals made on behalf of a participant. See Treas. Regs. 1.403(b)-4(c)(i) and 3(a)(4).

    Example 12: An employee participating in two salary reduction IRC 403(b) plans with separate employers must count the elective deferrals made under both plans in applying the limit. If this employee also participated in a CODA under IRC 401(k), or a simple retirement account under IRC 408(p), elective deferrals under those plans are also counted. See IRC 402(g)(3).

    Note:

    It is critical to determine which (if any) contributions are elective deferrals because the IRC 402(g) limit only applies to elective deferrals.

  6. In addition to the IRC 402(g) limit that applies to the participant, IRC 403(b)(1)(E) requires the contract to satisfy 401(a)(30), which requires the contract terms to provide that elective deferrals will not exceed IRC 402(g) limits.

  7. The contract requirement under IRC 403(b)(1)(E) applies only to limit elective deferrals under annuity contracts purchased by a single employer. See IRM 4.72.13.9.

  8. The IRC 402(g) limit must always be considered in examining an IRC 403(b) plan with elective deferrals. For example, when considering the contribution limits in 2014, even if the limitation under IRC 415 is $ 52,000, IRC 402(g) further limits elective deferrals to $17,500 (or a maximum of $20,500 ($17,500 plus $3,000 if the full IRC 402(g)(7) 15-year catch-up limit applies)).

  9. The IRC 402(g) limits are adjusted periodically pursuant to IRC 402(g)(4). Recent limits are as follows:

    1. 2014: $17,500

    2. 2013: $17,500

    3. 2012: $17,000

    4. 2011: $16,500

    5. 2010: $16,500

    6. 2009: $16,500

    7. 2008: $15,500

4.72.13.11.3  (11-12-2014)
Catch-Up Contributions

  1. IRC 402(g)(7) provides a special election for certain long-term employees to catch-up on the funding of their IRC 403(b) retirement benefit by increasing their elective deferrals over the normal dollar limit.

  2. Treas. Reg 1.403(b)-4(c)(3) provides that the election is available only to an employee who has completed at least 15 years of service (as defined in IRC 403(b)(4) and Treas. Reg. 1.403(b)-4(e)) with an employer that is:

    1. An educational organization as described in IRC 170(b)(1)(A)(ii)

    2. A hospital

    3. A home health service agency

    4. A health and welfare service agency

    5. A church-related organization, as defined in Treas. Reg. 1.403(b)-2(b)(6)

    6. An organization as described in IRC 414(e)(3)(B)(ii)

      Note:

      A year of service is based on the employer's annual work period, not the employee's taxable year.

  3. With the exception of church related organizations or organizations controlled by a church related organization, years with different employers cannot be added together for purposes of satisfying the 15-year requirement. See Treas. Reg. 1.403(b)-4(c)(3)(ii)(B), and Treas. Reg. 1.403(b)-4(e)(3).

    Example 13: Employee A is a teacher with the County W school system. She has been employed by County W for 6 years, but worked for County V for 10 years, prior to coming to County W. There is a State Teachers Retirement System that covers all of Employee A’s years with both County W and County V. Only the years that are worked while a teacher for County W may be counted for purposes of using the 15 year catch-up.

  4. Under the IRC 402(g)(7) election, the IRC 402(g)(1) dollar limitation is increased by the smallest of:

    1. $ 3,000,

    2. $ 15,000 minus any elective deferrals previously excluded under this catch-up election, plus any amount of designated Roth contributions in prior years under this catch-up, or

    3. $ 5,000 multiplied by the employee's years of service minus the elective deferrals made to plans of the organization in prior taxable years.

      Note:

      For purposes of c), years of service (YOS) are calculated through the end of the year for which the calculation is being made. For example, to determine limit for 2014, count YOS through 2014.

  5. There is a lifetime limit of $15,000 for this catch-up election. See IRC 402(g)(7)(A)(ii).

  6. In addition to the 15 year catch-up, IRC 414(v) allows an individual who attains age 50 prior to the end of the year to make an additional catch-up of $5,500 (2009 though 2014).

  7. For an employee eligible to use both the fifteen year catch-up and the age 50 catch-up, the 15 year catch-up must be applied first. Then an amount may be contributed as an age 50 catch-up to the extent the age 50 catch-up limit exceeds the 15 year catch-up limit. See Treas. Reg. 1.403(b)-4(c)(3)(iv).

  8. The following examples demonstrate how the limits under IRC 402(g) and IRC 414(v) apply to elective deferrals under IRC 403(b) plans:

    Example 14: In 2014, Employee A, age 45, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, and 12 years of service (YOS) with the County W school system. Employee A has made no other elective deferrals under any other IRC 403(b) or IRC 401(k) plans in 2014.
    For 2014, the maximum elective deferral that Employee A may contribute to the IRC 403(b) plan is determined as follows:

    1. General Limit under IRC 402(g)(1) is $17,500,

    2. Employee A does not have 15 YOS, therefore the 15 YOS catch-up under 402(g)(7) is not available,

    3. Employee A has not attained age 50, therefore the Age 50 catch-up is not available.

    Employee A is not eligible for any catch-up contributions, so the maximum Employee A can defer is $17,500.

    Example 15: In 2014, Employee B, age 45, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, and 15 YOS with the County W school system, and has made no other elective deferrals under any other IRC 403(b) or IRC 401(k) plans in 2014. Employee B has not made any contributions to the IRC 403(b) plan prior to 2014.
    For 2014, the maximum elective deferral that Employee B may contribute to the IRC 403(b) plan is determined as follows:

    1. General Limit under IRC 402(g)(1) is $17,500

    2. Employee B has 15 YOS, can use the 15 YOS catch-up of $3,000 (no prior deferrals under the plan or prior use of this catch-up rule).

    3. Employee B had not attained age 50, therefore not eligible for the Age 50 catch-up.

    The maximum amount Employee B can defer is $20,500 ($17,500 plus $3,000 15 YOS catch-up).

    Example 16: In 2014, Employee C, age 50, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, 10 YOS with the County W school system. Employee C has made no other elective deferrals under any other IRC 403(b) or IRC 401(k) plan in 2014.
    For 2014, the maximum elective deferral that maybe contributed to the IRC 403(b) plan is determined as follows:

    1. General Limit under IRC 402(g)(1) is $17,500.

    2. Employee C does not have 15 YOS, therefore not eligible to use the 15 YOS catch-up.

    3. Employee C has attained age 50, therefore eligible for the Age 50 catch-up of $5,500.

    The maximum amount Employee C can elect to defer is $23,000 ($17,500 plus $5,500 Age 50 catch-up).

    Note:

    The Age 50 catch-up does not count against the IRC 402(g) or IRC 415 limits.

    Example 17: In 2014, Employee D, age 50, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, and 15 YOS with Hospital H. Employee D has made no other elective deferrals under IRC 403(b) or IRC 401(k) in 2014 and this is the first year Employee D has contributed to the IRC 403(b) plan.
    For 2014, the maximum elective deferral that Employee D may defer under the IRC 403(b) plan is determined as follows:

    1. General Limit under IRC 402(g)(1) is $17,500.

    2. Employee D has 15 YOS, can use the 15 YOS catch-up of $3,000 (no prior deferrals under the plan or prior use of this catch-up rule).

    3. Employee D has attained age 50, therefore is eligible for the Age 50 catch-up of $5,500.

    The maximum amount Employee D can elect to defer is $26,000 ($17,500 plus $3,000 plus $5,500), because Employee D is eligible for both the 15 YOS catch-up and the Age 50 catch-up. If Employee D defers only $23,000, then $3,000 will count as the 15 YOS catch-up contribution (reducing future 15 YOS catch-up contributions because of the $15,000 lifetime limit) and $2,500 will count as the Age 50 catch-up.

    Example 18: In 2014, Employee E, age 45, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, and 15 YOS under the Teachers Retirement System in the state he teaches in. Employee E worked 5 years at City College X and has 10 YOS with State University Y. Employee E has made no other contributions under any other IRC 403(b) or IRC 401(k) in 2014 and this is the first year Employee E has contributed to the IRC 403(b) plan sponsored by State University Y.
    For 2014, the maximum elective deferral that maybe contributed to the IRC 403(b) plan is determined as follows.

    1. General Limit under IRC 402(g)(1) is $17,500.

    2. Employee E does not have 15 YOS with State University Y, therefore cannot use the 15 YOS catch-up under IRC 402(g)(7).

    3. Employee E has not attained age 50, there is not eligible for the Age 50 catch-up.

    The maximum amount Employee E can elect to defer is $17,500 because Employee E is not eligible for any catch-up.

    Example 19: In 2014, Employee F, age 50, has taxable compensation of $70,000 prior to IRC 403(b) elective deferrals, and 20 YOS with Hospital H. Employee F has made no other elective deferrals under any other IRC 403(b) or IRC 401(k) plans in 2014. Employee F has made elective deferrals in prior years under the IRC 403(b) equal to $175,000.
    For 2014, the maximum amount that Employee F can elect to defer is determined as follows:

    1. General Limit under IRC 402(g)(1) is $17,500.

    2. Employee F has 15 YOS, however, because Employee F had deferrals in prior years, 402(g)(7) is only available if prior deferrals do not exceed $5,000 x YOS: thus 20 YOS x $5,000 = $100,000. Employee F had prior deferrals of $175,000 which exceed $100,000, therefore the 15 YOS catch-up limit is $0

    3. Employee F has attained age 50, therefore is eligible for IRC 414(v) Age 50 Catch-Up limit of $5,500.

    The maximum amount Employee F can elect to defer is $23,000 ($17,500 plus $5,500 under the age 50 catch-up).

4.72.13.11.4  (11-12-2014)
Effect of Contributions in Excess of IRC 402(g) Limit

  1. An excess deferral is an elective deferral in excess of the IRC 402(g) limit.

  2. An excess deferral made to an IRC 403(b) contract(s) purchased by a single employer is includible in gross income in the year of contribution and again in the year of distribution unless it is timely corrected as described in (3), below. The earnings are taxable in the year of distribution.

  3. To the extent permitted by the terms of an IRC 403(b) contract, excess deferrals plus any earnings thereon, may be distributed by April 15th of the following taxable year. If such a distribution is made, the excess deferrals are included in gross income in the year of contribution and the earnings are includible in gross income in the year of distribution. See IRC 402(g) and Treas. Reg. 1.403(b)-4(f)(4). The distribution may be made notwithstanding any other provision of law.

  4. The issuer must file a Form 1099-R(s) reporting the distribution.

  5. The employer is responsible for applicable employment taxes and income tax withholding.

  6. If excess deferrals are made by an employee to contracts of two unrelated employers and they are not timely corrected, the excess is taxed both in the year contributed and again on distribution, unless the excess deferrals and the earnings thereon are timely distributed by the IRC 403(b) contract(s).

    Example 20: Association, a 501(c)(3) organization, maintains an IRC 403(b) plan (Plan) with a calendar plan year. In 2014, each of the highly compensated employees elects to make a contribution of $ 50,000 on the mistaken assumption that the contributions are not elective deferrals limited by IRC 402(g). The excess deferrals of $ 32,500 ($ 50,000 - $17,500) are not timely corrected by April 15, 2015. All contributions made to the affected annuity contracts are includible in the employees' gross income for taxable year 2014 and are subject to FICA. See Treas. Reg. 1.403(b)-3(a)(4) and IRC 401(a)(30). In addition, Association is responsible for employment taxes and withholding. The excess deferrals are taxable again on distribution.

    Note:

    All contracts or custodial accounts held by a participant exceeding the deferral limit will lose their IRC 403(b) status. Correction may be available under EPCRS if the excess was not distributed before the April 15 deadline. Timing of the return of excess deferrals determines how and when the excess is taxed.

    Example 21:The same facts as Example 20, except that $ 20,000 of the $ 50,000 contributed to the Plan in 2014 consists of non-elective employer contributions. The excess deferrals are timely corrected by being distributed with income to the employees by April 15, 2015. The excess elective deferrals of $12,500 ($30,000-$17,500) are includible in gross income for tax year 2014.

    Note:

    Earnings through the date of correction are taxable in the year distributed. There is no 10% early distribution tax, 20% income tax withholding, or spousal consent requirement on amounts timely distributed.

4.72.13.11.5  (11-12-2014)
Examination Steps for IRC 402(g)

  1. Check the plan documents, summary plan description (SPD), election forms and funding vehicles to determine whether contributions are properly limited to IRC 402(g). Review plan for Roth provisions.

  2. Determine if plan allows for any catch-up contributions.

  3. Sample participants and compare amounts withheld on W-2 to amounts required or allowed by the terms of the plan.

    Note:

    A Plan must operate in compliance with its terms. Plans subject to ERISA may need to be referred to the DOL.

  4. Analyze participants whose deferrals exceed the basic limit to determine whether they are entitled to use the 15 year catch-up and/or age 50 catch-up.

    1. Verify age and years of service through personnel records.

    2. Prior year allocation reports, W-2s, salary deferral election forms, and related plan documents may also be needed to establish the facts necessary to determine entitlement for catch-up contributions and the proper limit.

  5. For elective deferrals in excess of the basic IRC 402(g) limit, request and analyze employer/vendor calculations, salary deferral election forms and other appropriate source documentation to determine if any 15 year catch-up contributions are properly coordinated with age 50 catch-up contributions. See Treas. Regs 1.403(b)-4(c)(3)(iv).

  6. Determine if the employer has any other plan covering the same employees, to verify that the combined amount of elective salary deferrals are within the IRC 402(g) limit.

  7. If any information indicates that the employees are covered by another plan maintained by an unrelated employer, which allows for elective deferrals under IRC 402(g), determine whether the combined amount of elective deferrals meets the IRC 402(g) limit for the individual.

  8. Determine whether any excess elective deferrals were timely distributed. Excess deferrals are includible in income for the year in which the excess occurred. If not timely corrected, excess deferrals and earnings should also be reported in the year distributed. In the absence of timely corrective distributions, consider appropriate enforcement and corrective action under EPCRS. Document whether there is compliance with the withholding and reporting requirements in Rev. Proc. 92-93, Notice 89-32, Notice 88-33, and Notice 87-77.

  9. Review salary reduction contributions that have been excluded from the IRC 402(g) limit due to a one-time irrevocable election or as a condition of employment.

  10. Determine whether contributions are elective deferrals by examining the substance of the arrangement. When determining whether deferrals are elective, consider:

    1. The operation of the plan and whether participants have revoked their elections.

    2. Employment conditions and whether contributions are a condition of employment.

    3. Plan documents, SPDs, funding vehicles and any memorandum or other communications to employees.

    Note:

    Employer’s descriptive labels may be misleading; such as employer, employee, mandatory, one-time irrevocable or condition of employment.

  11. If contributions are found not to be condition of employment contributions or valid one-time irrevocable elections the amount contributed is included in the IRC 402(g) limit.

4.72.13.12  (11-12-2014)
IRC 415 Limit

  1. An IRC 403(b) plan is treated as a defined contribution plan for purposes of the IRC 415 contribution limits.

  2. In general, IRC 415 places an overall limit on the amount of annual additions (elective deferrals and contributions other than elective deferrals) that may be made annually on an employee’s behalf to an IRC 403(b) plan during a single limitation year. The maximum IRC 415 contribution may not exceed the lesser of 100% of includible compensation (see IRM 4.72.13.12.1, Includible Compensation) or the dollar limits identified in IRC 415(c) (adjusted pursuant to IRC 415(d)) in the limitation year. See Treas. Reg. 1.403(b)-4(b). The dollar limitations are as follows:

    1. 2014: $52,000

    2. 2013: $51,000

    3. 2012: $50,000

    4. 2011: $49,000

    5. 2010: $49,000

    6. 2009: $49,000

    7. 2008: $46,000

  3. The IRC 415 limit applies to contributions made to an IRC 403(b) plan with respect to the limitation year regardless of whether they are vested.

    1. Generally, the limitation year is the calendar year unless a participant elects another 12 month period. See Treas. Reg. 1.415(j)-1(e)(1).

    2. If a participant is in control of an employer, the limitation year is the limitation year of the employer. See Treas. Reg. 1.415(j)-1(e)(2).

    3. Control and affiliation for purposes of Treas. Reg. 1.415(j)-1(e) are defined under IRC 414(b), IRC 414(c) and IRC 415(h).

  4. There are alternative limitations available for employees of a church or related organization pursuant to IRC 415(c)(7). These employees may elect to substitute the IRC 415 limit with an annual limit of $ 10,000 (even if more than 100 percent of includible compensation) up to a total lifetime limit of $40,000.

  5. Under IRC 414(u), contributions by an employer or employee pursuant to veterans' re-employment rights under the Uniform Services Employment and Re-employment Rights Act of 1994 (USERRA), are not treated as contributions made in the year the contributions are made, but in the year to which they relate, for purposes of IRC 415.

  6. Under IRC 414(v), contributions made pursuant to the age 50 catch-up election are not treated as contributions for the purposes of IRC 415. See Treas. Reg. 1.403(b)-4(b)(2).

4.72.13.12.1  (11-12-2014)
Includible Compensation

  1. Includible compensation is generally all salary from the employer includible in gross income for federal income tax purposes for the employee's most recent one year period of service ending with or within the taxable year. See Treas. Reg. 1.403(b)-2(b)(11). Also see Treas. Reg. 1.403(b)-4(e) for rules to determine a year of service.

  2. Includible compensation also includes a participant's elective deferrals (all elective deferrals as described in IRC 402(g)(3)), and amounts not included in an employee's gross income by reason of IRC 125 or IRC 457(b). See Treas. Reg. 1.403(b)-2(b)(11).

  3. Includible compensation does not include:

    1. Contributions (vested or not vested) made by the employer to a qualified plan.,

    2. Contributions picked up by the employer under IRC 414(h)(2), because they are not currently includible in compensation. See Rev. Rul. 79-221.

    3. Non-elective employer contributions to an IRC 403(b) plan of the employer even if the contributions are includible in gross income.

    4. Compensation received while the employer was not an employer eligible to maintain the IRC 403(b) plan. See Treas. Reg. 1.403(b)-2(b)(11).

    5. Compensation received prior to the employee's most recent one-year period of service. See Treas. Reg. 1.403(b)-2(b)(11).

  4. For 2014, the maximum amount of compensation that may be taken into account is $260,000. See Treas. Reg. 1.403(b)-5(a)(ii).

4.72.13.12.2  (11-12-2014)
Special Rule for Former Employees

  1. IRC 403(b) allows contributions to be made for former employees with respect to:

    1. Certain compensation paid by the later of 2 ½ months after severance from employment or the end of the limitation year that includes the date of severance from employment (See Treas. Reg. 1.415(c)-2(e)(3)(i)), and

    2. Compensation paid to participants who are permanently and totally disabled or relating to qualified military service under IRC 414(u) (See Treas Reg. 1.415(c)-2(e)(4), Treas. Reg. 1.415(c)-2(g)(4), or Treas. Reg. 1.415(c)-2(g)(7)).

  2. IRC 403(b)(3) allows for certain amounts to be excludable from gross income for post-severance contributions to an IRC 403(b) plan for up to five years after an employee has a severance from employment. See Treas. Reg. 1.403(b)-4(d).

    1. Only non-elective employer contributions may be excluded and the contributions must fall within the IRC 415 limit.

    2. A former employee is deemed to have monthly includible compensation for the period through December 31 of the year in which he or she has a severance from employment and through the end of each of the next five taxable years. See Treas. Reg. 1.403(b)-4(d).

    3. The amount of the monthly includible compensation is equal to one twelfth of the former employee's includable compensation during the former employee's most recent year of service.

    Example 22: Employee A, a school teacher, severs employment from a public school and is entitled to receive $25,000 in accumulated sick leave and annual leave which, under a collective bargaining agreement, may be received in cash. Three days before this amount is to be paid, Employee A requests that the payroll office pay this amount into her IRC 403(b) plan over the next five years.

    Note:

    In this example, the contributions would be made pursuant to a salary reduction agreement because Employee A has the option to have the employer contribute the amount or receive the amount in cash. Employee A may not utilize the five year provision because the five year provision only applies to non-elective employer contributions.

    Example 23: The same facts as in Example 22, except that in the normal course of collective bargaining, a union has bargained away the right to receive the payment of accumulated sick and annual leave in cash and the amounts are required to be paid directly to the IRC 403(b) plan by the employer.

    Note:

    The amounts are non-elective employer contributions which can be contributed pursuant to plan terms over a period of five years following severance of employment pursuant to the five year provision assuming they satisfy the limit under IRC 415 and the definition of includible compensation .

    Example 24: As part of an employment contract, Public School District Z agrees to contribute to Superintendent A's IRC 403(b) account $41,000 each year for five years following her retirement for a total of $205,000 in deferred compensation. Her last year's salary exceeds $41,000. This is a permissible use of the five year provision because her includible compensation for her most recent one-year period of service is in excess of $41,000. This benefit does not violate nondiscrimination and coverage requirements which are not applicable to governmental IRC 403(b) plans with respect to non-elective employer contributions. See IRM 4.72.13.14, Nondiscrimination and Coverage.

    Example 25: Public University A maintains an IRC 403(b) plan under which it contributes annually 10 percent of compensation for participants, including for the first five calendar years following the date on which the participant ceases to be an employee. The plan provides that if a participant who is a former employee dies during the first five calendar years following the date on which the participant ceases to be an employee, a contribution is made that is equal to the lesser of

    1. The excess of the individual’s includible compensation for that year over the contributions previously made for the individual for that year; or

    2. The total contributions that would have been made on the individual’s behalf thereafter if he or she had survived to the end of the five year period.

    Individual C’s annual includible compensation is $72,000 (so that C’s monthly includible compensation is $6,000). A $600 contribution is made for C for January of the first taxable year following retirement (10 percent of individual C’s monthly includible compensation of $6,000). Individual C dies during February of that year. Public University A makes a contribution for Individual C for February equal to $11,400 (Individual C’s monthly includible compensation for January and February, reduced by $600).

    Note:

    The contribution does not exceed the amount of Individual C’s includible compensation for the taxable year for purposes of IRC 415(c), but any additional contributions would exceed Individual C’s includible compensation for purposes of IRC 415(c).

4.72.13.12.3  (11-12-2014)
IRC 415 Aggregation

  1. Under IRC 415, a participant is considered to exclusively control and maintain his or her own an IRC 403(b) plan. See Treas. Reg. 1.415(f)-1(f)(1).

  2. Contributions to an IRC 403(b) plan are not combined or aggregated with contributions to a qualified defined contribution plan except when a participant controls any employer. In this situation, the IRC 403(b) plan is treated as a defined contribution plan maintained by both the employer and the participant. See Treas. Reg. 1.415(f)-1(f)(2).

  3. Where a participant controls any employer (this may be the employer contributing to the IRC 403(b) plan or another employer) for a limitation year, the contributions to the IRC 403(b) plan are combined with contributions to a qualified plan by the controlled employer or any affiliated employer under IRC 415.

  4. Excess deferrals are attributed to the IRC 403(b) plan.

  5. The following examples illustrate that an employee who is covered by a qualified defined contribution plan of the employer may also participate in an IRC 403(b) plan through the employer without having to aggregate the plans under IRC 415. Thus, annual additions could be contributed to each plan up to the IRC 415 limit. So, the employer could contribute non-elective deferrals of up to $ 52,000 (in 2014) to the IRC 403(b) plan even though the employee has contributions under the IRC 401(a) qualified defined contribution plan which are at the IRC 415 maximum.

    Example 26: Employee A is employed by an IRC 501(c)(3) organization. The organization contributes to an IRC 403(b) plan on behalf of Employee A in the limitation year. Employee A is also a participant in the organization's defined contribution plan. Employee A is not required to aggregate contributions under the qualified defined contribution plan with those made under the IRC 403(b) plan for purposes of testing under IRC 415.

    Example 27: The facts are the same as in Example 26, except that Employee A is also a participant in a defined contribution plan of a corporation in which he is more than a 50 percent owner. The defined contribution plan of Employee A's corporation must be combined with Employee A's IRC 403(b) plan for purposes of applying the limit under IRC 415(c) because Employee A controls his corporation.

4.72.13.12.4  (11-12-2014)
Contributions in Excess of the IRC 415 Limit

  1. Contributions to an IRC 403(b) plan in excess of the IRC 415 limit are includible in the employee's gross income for the tax year ending with or within the limitation year. See Treas. Reg. 1.403(b)-4(a).

    Example 28: Foundation X is an IRC 501(c)(3) organization which maintains an IRC 403(b) plan (Plan) for its employees. The gross annual compensation of Employee A equals $ 70,000. Contributions to the Plan on behalf of Employee A equal $55,000 (all are non-elective employer contributions) in the limitation year ending December 31, 2014, $3,000 above the allowable IRC 415 limit. The $3,000 excess is includible in Employee A's gross income for the 2014 taxable year.

  2. Under Treas. Reg. 1.403(b)-4(f)(2), amounts in excess of the IRC 415 limit must be placed in a separate account which constitutes a separate account for the purposes of IRC 72.

  3. Treas. Reg. 1.415(a)-1(b)(2) provides the separate account must be maintained for the excess IRC 415(c) contributions or all contracts fail to be IRC 403(b) contracts. See Rev. Proc. 2013-12 for correction methods available under EPCRS.

4.72.13.12.5  (11-12-2014)
Excise Tax

  1. IRC 4973 imposes a 6 percent cumulative excise tax on the employee for excess contributions made to an IRC 403(b)(7) custodial account. See IRC 4973(a).

  2. Excess contributions are the excess of the amount contributed over the IRC 415 limit. See IRC 4973(c).

  3. To the extent contributions are in excess of the IRC 415 limit, the contributions are taxable. See Treas. Reg. 1.403(b)-4(f)(1) and (2).

  4. The IRC 4973 excise tax applies only to excess contributions to a custodial account and is not applicable to an IRC 403(b)(1) annuity contract or IRC 403(b)(9) retirement income account. See Treas. Reg. 1.403(b)-8(d).

  5. Excess contributions are determined at the end of the taxable year. See IRC 4973(a).

  6. Contributions are tested on a yearly basis with respect to the applicable IRC 415 limit for the year.

    Example 29: Foundation A maintains an IRC 403(b) plan (Plan) on behalf of its employees. The funding vehicles for the Plan include both annuity contracts and custodial accounts. In the limitation year ending December 31, 2014, 50 employees receive contributions in excess of the IRC 415 limit. The excess contributions are includible in employees' gross income in taxable year 2014. Any portion of the excess IRC 415 amounts invested in the custodial accounts are subject to the excise tax under IRC 4973. See IRC 4973(c) to calculate the applicable tax.

4.72.13.12.6  (11-12-2014)
Examination Steps for IRC 415

  1. Review the plan documents, plan amendments and SPD to determine the types of contributions allowed under the plan and that plan language properly limits contributions. See IRC 415

  2. Determine the annual additions (after-tax employee contributions, non-elective employer contributions and salary reduction contributions, which includes elective deferrals, irrevocable one-time elections made at initial eligibility, and mandatory contributions required as a condition of employment) made to the plan for the limitation year.

  3. Determine if the employer is part of a controlled group or affiliated service group and if so, whether contributions have been aggregated.

  4. Sample contributions allocated and compare with the amounts required by the terms of the plan. Determine if any annual additions have exceeded the yearly IRC 415(c) limitations.

  5. Determine to what extent the employer informs the employee of the aggregation of the IRC 403(b) account with any defined contribution plan of an employer controlled by the employee. See Treas. Regs. 1.415(f)-1(f) and 1.415(g)-1(b)(3)(iv)(C).

  6. Determine the employer’s policy regarding outside employment, and secure any records available regarding such outside employment.

  7. Verify whether the combined plans exceed the IRC 415(c) limits.

    Example 30: Doctor A is employed by a non-profit hospital to which IRC 501(c)(3) applies and which provides him with an IRC 403(b) annuity contract. Doctor A also maintains a private practice as a shareholder owning more than 50 percent of a professional corporation. Any qualified defined contribution plan of the professional corporation must be aggregated with the IRC 403(b) annuity contract for purposes of applying the limitations of IRC 415(c) and Treas. Reg. 1.415(c)-1.

  8. Determine if any participant has excess contributions and to what extent the funds are invested through a custodial account. Secure and process forms 5330 for the excise taxes due under IRC 4973. See IRM 4.71.5, Employee Plans Examination of Returns - Form 5330 Examinations.

4.72.13.13  (11-12-2014)
Deemed IRAs under IRC 408(q)

  1. Under IRC 408(q), an IRC 403(b) plan may include traditional Individual Retirement Accounts (IRAs) or Roth IRAs (or both) set up for employees of the employer maintaining the IRC 403(b) plan. Employee contributions to these IRAs (called “deemed IRAs”) are subject to the same requirements that apply to IRAs that are not deemed IRAs. See Treas. Reg. 1.403(b)-10(e).

    1. There must be separate accounting for each employee’s deemed IRA and, if the deemed IRA is an annuity, it must be held under a separate contract from any contact holding non-deemed IRA assets of the IRC 403(b) plan. Treas. Reg. 1.408(q)-1(f)(2) and (3).

    2. The plan must state that the deemed IRAs meet the applicable requirements of IRC 408 or IRC 408A, or both, as applicable. Treas. Reg. 1.408(q)-1(d).

    3. The deemed IRAs and the IRC 403(b) plan are treated as separate entities: the separately applicable rules apply to deemed IRAs and the IRC 403(b) plan. Treas. Reg. 1.408(q)-1(d).

    4. Unless the deemed IRAs are held in a single trust with the IRC 403(b) plan, a qualification defect in the plan will not have adverse consequences to the deemed IRAs. Treas. Reg. 1.408(q)-1(g).

  2. Since the IRA rules apply to the deemed IRAs, the required beginning date for distributions from a deemed IRA is April 1st following the year the employee attains age 70½, even if the employee is still working. See Treas. Reg. 1.408(q)-1(e).

4.72.13.13.1  (11-12-2014)
Deemed IRAs Examination Steps

  1. Review the written plan document and all amendments to determine if the plan allows for deemed IRAs.

  2. Confirm that deemed IRA contributions have not been made prior to the adoption of plan provisions permitting such contributions.

  3. Make sure contributions to the deemed IRAs satisfy the limits under IRC 408 and IRC 408A.

  4. Confirm whether separate accounts are maintained or the assets are commingled.

4.72.13.14  (11-12-2014)
Nondiscrimination and Coverage

  1. The Tax Reform Act of 1986 (TRA '86) imposed nondiscrimination and coverage rules on IRC 403(b) plans under IRC 403(b)(12).

    1. These rules were amended by PPA ’06.

    2. Treas. Reg. 1.403(b)-5 describes the nondiscrimination rules reflected in PPA ‘06.

  2. Different nondiscrimination rules apply depending on the type of contribution.

    1. Elective deferrals are subject to the universal availability rule. See IRC 403(b)(12)(A)(ii) and Treas. Reg. 1.403(b)-5(b).

    2. Contributions other than elective deferrals must follow discrimination rules similar to those for plans qualified under IRC 401(a). See IRC 403(b)(12)(A)(i) and Treas. Reg. 1.403(b)-5(a).

  3. In general, nondiscrimination and coverage requirements with respect to contributions other than elective deferrals do not apply to governmental IRC 403(b) plans. See IRC 403(b)(12)(C).

    1. A governmental plan, as defined in IRC 414(d), is one maintained by a State or local government or political subdivision, agency or instrumentality thereof.

    2. The compensation limit under IRC 401(a)(17) still applies to governmental plans. See IRC 403(b)(12)(C) and Treas. Reg. 1.403(b)-5(a)(5).

  4. Nondiscrimination rules do not apply to churches or qualified church-controlled organizations (as defined by IRC 3121(w)(3)(B)). See Treas. Reg. 1.403(b)-5(d).

  5. Under IRC 414(u), an IRC 403(b) plan is not treated as failing nondiscrimination or coverage requirements by reason of the making of employer or employee contributions (or the right to make such contributions) made pursuant to veterans' reemployment rights under USERRA.

4.72.13.14.1  (11-12-2014)
Elective Deferrals —Universal Availability

  1. Elective deferrals are tested separately from non-elective employer contributions for nondiscrimination. See IRC 403(b)(12)(A)(ii) and Treas. Reg. 1.403(b)-5(b).

  2. The nondiscrimination requirement for elective deferrals is satisfied only if the plan allows each employee (with very limited exceptions) to elect to defer more than $200 annually if any employee may make an elective deferral. See IRC 403(b)(12)(A)(ii). This test is referred to as universal availability. See Treas. Reg. 1.403(b)-5(b).

  3. Unlike a qualified cash or deferred arrangement (CODA), nondiscrimination with respect to elective deferrals is not satisfied through compliance with the ADP test.

  4. An IRC 403(b) plan is permitted to take into account coverage under another plan to satisfy universal availability through deferral opportunities under another plan. See Treas. Reg. 1.403(b)-5(b)(4)(iii).

  5. Universal availability requires that all employees of a IRC 403(b) plan sponsor be permitted to make elective deferrals if any employee of the plan sponsor may make an elective deferral, subject to statutory exclusions described in paragraph (9) below. See Treas. Reg. 1.403(b)-5(b).

  6. An employee is not considered to have had the right to make an election for an elective deferral if the employee does not have an "effective opportunity" to make such an election at least once during the plan year. See Treas. Reg. 1.403(b)-5(b)(2).

  7. "Effective opportunity" is a facts-and-circumstances test. An effective opportunity is not considered to exist if there are any other rights or benefits that are conditioned (directly or indirectly) upon making or failing to make a cash or deferred election. See Treas. Reg. 1.403(b)-5(b)(2).

  8. Factors that determine "effective opportunity" Include:

    1. Notice to the employee of the election and its availability

    2. Period of time during which the election can be made

    3. Any conditions placed on the election by the plan sponsor

      Note:

      See Treas. Reg. 1.403(b)-5(b)(2).

  9. Additional catch-up contributions under IRC 414(v) or 402(g)(7) must also be universally available to employees if these are made available to any employee. See Treas. Reg. 1.403(b)-5(b)(2).

    Note:

    See also the special universal availability rule under Treas. Reg. 1.414(v)-1(e).

  10. Excludable employees may be disregarded in applying the universal availability test for salary reduction contributions. See Treas. Reg. 1.403(b)-5(b)(4). These include:

    1. Non-resident aliens with no U.S. source income

    2. Employees who normally work less than 20 hours per week (or such lower number of hours per week as may be set forth in the plan)

      Note:

      This exception must be based on hours worked and cannot be based on a job classification (such as "part-time employee" or "adjunct professor" ) unless the classification is defined in the plan using the permitted hours requirements. Once an employee can no longer be excluded under b), the employee always remains eligible to participate thereafter (i.e., once-in-always-in). See Treas. Reg. 1.403(b)-5(b)(4)(iii)(B).

    3. Students performing certain services (as described in IRC 3121(b)(10))

      Note:

      Some full-time students may not meet this requirement. See Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44 (U.S. 2011).

    4. Employees whose maximum elective deferrals under the plan would be no greater than $200

    5. Employees eligible to participate and make elective deferrals under an eligible 457(b) plan, a qualified CODA (i.e., an IRC 401(k) plan) or another IRC 403(b) plan of the employer

      Note:

      For exclusions b) and c) above, if any employee who would be excluded under either exclusion is permitted to participate, then no employee may be excluded under that exclusion. See Treas. Reg. 1.403(b)-5(b)(4)(i). So if the plan allows an employee working less than 20 hours per week to participate, the plan cannot exclude any employee using the less than 20 hours per week exclusion.

    Example 31: Public School System A sponsors an IRC 403(b) plan. The plan document provides that all employees may participate except for employees who normally work less than 20 hours per week. The plan further states an employee normally works fewer than 20 hours per week if and only if:

    • For the 12 month period beginning on the date the employee’s employment commenced, the employer reasonably expects the employee to work fewer than 1,000 hours of service; and

    • For each plan year ending after the close of the 12 month period beginning on the date the employee’s employment commenced (or, if the plan so provides, each subsequent 12 month period), the employee worked fewer than 1,000 hours of service in the preceding 12 month period.

      Note:

      In operation, the plan allows certain teachers who work less than 1,000 hours of service each year to participate. Thus, the plan cannot exclude any employees on the basis of working less than 1,000 hours in a year. See Treas. Reg. 1.403(b)- 5(b)(4)(i).

    Example 32: The same facts apply as in Example 31. The school system does not treat substitute teachers as employees who are eligible for other employee benefits. In operation the plan excludes substitute teachers because they are substitute teachers, regardless of hours worked. For purposes of IRC 403(b), the substitute teachers cannot be excluded for universal availability on the basis of classification or hours worked, because the plan has allowed other employees to participate with less than 1,000 hours of service for the plan year.

    Note:

    Unlike a qualified plan, an IRC 403(b) plan is not generally permitted to have any minimum age and service exclusion for elective deferrals. But see Treas. Reg. 1.403(b)-5(b)(4)(ii)(D).

  11. Plans that are subject to Title I of ERISA may not be eligible to use the exception in paragraph (10)b) for employees who work less than 20 hours per week. See Treas. Reg. 1.403(b)-5(b)(4)(iii)(B)(2).

  12. Under Treas. Reg. 1.403(b)-5(b)(3) the universal availability requirement applies separately to each IRC 501(c)(3) organization.

  13. Where the employer is a government, the universal availability requirement applies separately to each governmental entity that is not part of a common pay-roll. See Treas. Reg. 1.403(b)-5(b)(3).

  14. Examples 33-35 illustrate that elective deferrals are tested separately from other contributions for nondiscrimination and that these contributions must be offered universally to non-excludable employees.

    Example 33: University A maintains an IRC 403(b) plan. The plan provides that only senior administrative staff and faculty are eligible to make elective deferrals to the plan. University A also maintains a defined benefit plan for remaining employees. University A maintains no other plans of deferred compensation. Because the other employees cannot make elective deferrals to any plan, the plan does not satisfy IRC 403(b)(12)(A)(ii).

    Example 34: Only full-time employees are eligible to participate in an IRC 403(b) plan maintained by a university. There are 40 part-time clerical employees who are not students and who normally work 29 hours per week (or 1,508 hours per year). Since the part-time employees are not in a category of employees that may be excluded from making elective deferrals excludable, the plan does not satisfy the requirements of IRC 403(b)(12)(A)(ii).

    Example 35: A hospital maintaining an IRC 403(b) plan provides for elective deferrals only. Under the Plan, all medical doctors and senior administrative staff are eligible to participate in the plan immediately upon hire. All other employees, including nurses and other support staff, are eligible only after two years of service and attainment of age 21. The plan does not satisfy the requirements of IRC 403(b)(12)(A)(ii).

  15. The effect of violating IRC 403(b)(12)(A)(ii) is the loss of IRC 403(b) status. Contributions to the plan are therefore subject to income tax, employment tax and withholding. See Rev. Proc. 2013-12 for remedies under EPCRS.

4.72.13.14.1.1  (11-12-2014)
Elective Deferrals - Examination Steps

  1. Review the plan document for the eligibility requirements for the IRC 403(b) elective deferrals.

  2. Determine that the plan document only excludes employees listed in Treas. Reg. 1.403(b)-5(b)(4).

    Note:

    If the plan has permitted any employee excludable under Treas. Reg.1.403(b)-5(b)(4)(ii)(D) & (E) to make deferrals, then no other employees may be excluded under that provision. See Treas. Reg. 1.403(b)-5(b)(4)(i).

  3. Verify that employees are provided meaningful communication about the plan through review of information such as:

    1. The plan sponsor's employee benefits package/handbook

    2. Emails made available by the plan sponsor related to the operation of the plan

    3. The plan sponsor's internet site

    Note:

    This supports the requirements that the plan meets the universal availability requirement of Treas. Regs 1.403(b)-5(b)(2).

  4. Request and review the employer’s payroll records, including position descriptions and job classification codes.

    1. Reconcile to Forms W-2.

    2. Determine if employees are improperly excluded from making elective deferrals.

  5. If the plan excludes employees who work less than 20 hours per week, or 1,000 hours per year, analyze and verify how the employer monitors hours worked. Verify that once eligible, the employer properly notifies the employee of eligibility and permits entry into the plan by January 1 of the following year.

  6. Review excluded employees to determine if they were properly excluded from making an elective deferral. After the first day of the first taxable year that begins after December 31, 2009, the following employees cannot be excluded from participating in IRC 403(b) plan: See Treas. Reg. 1.403(b)-11(d)

    1. Employees who used a one-time election to participate in a governmental plan that is not a IRC 403(b) plan.

    2. Visiting professors for up to one year and employees affiliated with a religious order who take a vow of poverty.

    3. Union employees who were excluded must be able to participate in the IRC 403(b) plan by January 1, 2009, or the earlier of the date on which the collective bargaining agreement terminates or July 26, 2010.

      Note:

      A governmental plan may have until January 1, 2011, before they have to start including the employees listed above.

4.72.13.14.2  (11-12-2014)
Contributions Other Than Elective Deferrals

  1. For purposes of nondiscrimination, contributions other than elective deferrals include employer contributions and after-tax employee contributions made pursuant to a one-time irrevocable election made by the employee at the time of initial eligibility, and contributions made as a condition of employment. .

  2. Contributions other than elective deferrals are tested separately from elective deferrals for nondiscrimination. See IRC 403(b)(12) and Treas. Reg. 1.403(b)-5(a)

  3. IRC 403(b)(12)(A)(i) requires compliance with the following provisions:

    1. IRC 401(a)(4) (nondiscrimination)

    2. IRC 401(a)(5) (permitted disparity)

    3. IRC 401(a)(17) (compensation limit)

    4. IRC 401(m) (matching and after-tax employee contributions)

    5. IRC 410(b) (minimum coverage) for non-salary reduction contributions

  4. Contributions other than elective deferrals made to IRC 403(b) plans maintained by public schools or governmental entities are not subject to the nondiscrimination or coverage requirements (other than IRC 401(a)(17)) beginning in tax years on or after August 5, 1997 (prior to that date, governmental plans are deemed to satisfy these requirements, except IRC 401(a)(17)).

  5. With respect to contributions other than elective deferrals, excludable employees are those employees who have not satisfied the age and service requirements set forth in the plan.

  6. "Employer" is generally defined for purposes of nondiscrimination with respect to contributions other than elective deferrals to include related entities under:

    • IRC 414(b) controlled groups,

    • IRC 414(c) groups under common control,

    • IRC 414(m) affiliated service groups, and

    • IRC 414(o) other organizations or arrangements described by regulations.

    Note:

    Notice 89-23 is obsolete pursuant to Revenue Ruling 2009-18 except to the extent described in the last paragraph of the “Treatment of Controlled Groups that Include Tax-Exempt Employers” section of the preamble to the Final IRC 403(b) Regulations TD 9340. Therefore, the Notice 89-23 good faith reasonable standard will continue to apply to State and local public schools (and certain church entities) for determining the controlled group.

4.72.13.14.2.1  (11-12-2014)
Contributions Other Than Elective Deferrals - Examination Steps

  1. Review the plan document to determine what contributions other than elective deferrals are provided for under the plan.

  2. Review the employer’s payroll records to determine if employees are receiving contributions in accordance with plan provisions.

  3. Verify compensation is properly limited to IRC 401(a)(17).

  4. For non-governmental employers, the following steps will also need to be taken:

    1. Determine if the employer has related entities under IRC 414(b), IRC 414(c), IRC 414(m), and IRC 414(o).

    2. Determine whether the employer aggregates plans to pass coverage under IRC 403(b)(12) and IRC 410(b).

    3. Determine the number of highly compensated employees (as defined in IRC 414(q) and non-highly compensated employees and which of these employees are eligible to participate in the IRC 403(b) plan or other plans of the employer.

    4. Determine whether the matching and after-tax contributions satisfy the IRC 401(m) ACP test.

    5. If the plan has contributions other than elective deferrals, determine if the plan satisfies IRC 401(a)(4), IRC 401(a)(5) and IRC 410(b).

4.72.13.15  (11-12-2014)
Distribution Requirements

  1. Distributions from an IRC 403(b) plan are subject to different timing restrictions, depending on the source of the distribution. Different timing rules apply under Treas. Reg. 1.403(b)-6 to each of the following:

    1. Contracts (including retirement income accounts) other than custodial accounts and except to the extent of IRC 403(b) elective deferrals ,

    2. Custodial accounts except to the extent of IRC 403(b) elective deferrals, and

    3. IRC 403(b) elective deferrals.

4.72.13.15.1  (11-12-2014)
Early Distribution Restrictions

  1. Congress intended that contributions to an IRC 403(b) plan should generally be used for retirement and thus, IRC 403(b) imposes early distribution restrictions on contributions to an IRC 403(b) annuity contract.

    1. These restrictions are based on distribution events and relate to the earliest date at which distributions from an IRC 403(b) annuity contract may be made.

    2. Distributions generally may not be made prior to a certain triggering event.

    3. An IRC 403(b) plan may properly distribute amounts any time after such an event has occurred (as long as there is compliance with the minimum distribution rules, incidental death benefit distribution rules and direct rollover rules).

    4. These early distribution restrictions do not apply to after-tax employee contributions or amounts held in a separate account for eligible rollover distributions received by the IRC 403(b) plan. See Treas. Reg. 1.403(b)-6(i).

    5. Roth amounts must be distributed in accordance with IRC 402A.

  2. Under Treas. Reg. 1.403(b)-6(d), both Roth and non-Roth elective deferral contributions (and income on such contributions), are not permitted to be distributed earlier than (except for in the case of a plan termination or the correction of excess deferrals):

    1. Attainment of age 59 ½,

    2. Death,

    3. Disability (as defined in IRC 72(m)(7)),

    4. Severance of employment, or

    5. Hardship of the employee (limited to the amount of elective deferrals necessary to satisfy the hardship and subject to the rules of Treas. Reg. 1.401(k)-1(d)(3)).

    Note:

    These distribution restrictions are not applicable to elective deferrals made before January 1, 1989 (not including income on such contributions). See Treas. Reg. 1.403(b)-6(d)(1)(ii).

  3. Under Treas. Reg. 1.403(b)-6(b), amounts (other than elective deferrals) distributed from an annuity contract (not including a custodial account, but including a retirement income account) may not be distributed earlier than:

    1. Severance from employment,

    2. Prior to occurrence of some event such as: a fixed number of years or a stated age, or

    3. Disability.

      Note:

      After tax employee contributions and contracts issued by an insurance company prior to January 1, 2009, are not subject to the early distribution rules. See Treas. Regs. 1.403(b)-6(b) and 1.403(b)-11(e).

  4. Under Treas. Reg. 1.403(b)-6(c), distributions from a custodial account (not including amounts attributable to elective deferrals) may not be paid or made available to a distributee earlier than:

    1. Age 59 ½,

    2. Severance from employment,

    3. Death, or

    4. Disability (as defined in IRC 72(m)(7).

    Example 36: Employee A is a participant in an IRC 403(b) plan (Plan). The Plan is funded through both elective and non-elective employer contributions, which are invested in annuity contracts. Employee A is 30 years old, has not separated from service and is not disabled. Employee A withdraws $5,000 from his elective deferrals. The distribution violates Treas. Reg. 1.403(b)-6(d).

    Note:

    If the written plan allowed for this type of distribution then the written plan would not satisfy the requirements of Treas. Reg. 1.403(b)-3(b)(3).

    Example 37: Employee A is a participant in an IRC 403(b) plan (Plan) that is funded by IRC 403(b)(7) custodial accounts. Contributions to the Plan are limited to non-elective employer contributions. Employee A withdraws $10,000 from the Plan and has not severed employment or become disabled. Employee A is 40 years old. A's distribution violates Treas. Reg. 1.403(b)-6(c).

  5. Certain loans may also be treated as a distribution depending on the facts and circumstances under Treas. Reg. 1.403(b)-6(f). For example, a loan that is repaid through a reduction in the participant's accrued benefit results in an actual distribution under the plan.

  6. Under Treas. Reg. 1.403(b)-10(a)(1), a plan termination is permitted to be a distribution triggering event. Generally, this provision is effective January 1, 2009. See IRM 4.72.13.18, Correction Programs.

4.72.13.15.1.1  (11-12-2014)
Early Distribution Tax

  1. IRC 72(t) restricts premature distributions from an IRC 403(b) plan by imposing a 10 percent additional income tax with respect to distributions that are made prior to the events described in IRC 72(t).

  2. The IRC 72(t) tax generally applies to all distributions to participants or their beneficiaries except for those:

    1. Made after the attainment of age 59 ½,

    2. Made upon separation from service and after age 55,

    3. Made upon the death or disability, or

    4. Which are part of a series of substantially equal payments made over the life or life expectancy of the employee or the joint lives or life expectancies of the employee and the employee's designated beneficiary.

  3. A distribution allowable under Treas. Reg. 1.403(b)-6 may nevertheless be subject to IRC 72(t). For example, the tax applies to early distributions of non-elective deferrals made to an annuity contract even though Treas. Reg. 1.403(b)-6 would not restrict such distributions.

    Note:

    In Examples 36 and 37, the distributions to Employee A are also subject to the additional tax under IRC 72(t).

4.72.13.15.2  (11-12-2014)
Minimum Distribution Requirements

  1. IRC 403(b)(10) imposes minimum distribution requirements on IRC 403(b) annuity contracts.

  2. These requirements relate to the latest date at which distributions of a minimum amount must commence.

  3. In applying the minimum distribution rules, IRC 403(b) plans generally are treated as individual retirement arrangements (IRAs) under IRC 408. See Treas. Reg. 1.403(b)-6(e)(2).

    1. The rules in Treas. Reg. 1.408-8 apply to IRC 403(b) plans.

    2. The rules applicable to IRAs are generally the same as those applicable to qualified plans under IRC 401(a)(9).

    3. The minimum distribution requirements under IRC 401(a)(9) relate to the form and timing of both before and after death distributions. See Treas. Reg. 1.403(b)-6(e)(1).

    4. Under Treas. Reg. 1.408-8, A-5, the surviving spouse rule does not apply to an IRC 403(b) contract. Thus, the surviving spouse of a participant is not permitted to treat an IRC 403(b) contract as the spouse’s own IRC 403(b) contract, even if the spouse is the sole beneficiary. See Treas. Reg. 1.403(b)-6(e)(4).

  4. The required beginning date (RBD) or the date at which distributions must commence from a participant's IRC 403(b) annuity contract is April 1 of the calendar year following the later of the calendar year in which the employee attains age 70 ½ or the calendar year in which the employee retires from the employer maintaining the plan. See Treas. Reg. 1.403(b)-6(e)(3).

    Example 38: Participant Q is a participant in an IRC 403(b) plan that is sponsored by an IRC 501(c)(3) organization, is not a five percent owner, has not retired, and attains age 70 ½ in 2010. Participant Q’s RBD is April 1 of the calendar year following the year in which the participant retires.

  5. For an IRC 403(b) sponsor which is not a government or church, the RBD for a five percent owner applies and is April 1 following the calendar year in which the five percent owner attains age 70 ½. See Treas. Reg. 1.403(b)-6(e)(3).

    Note:

    As a practical matter, generally there are no 5 percent owners for IRC 403(b) plans.

  6. A governmental plan, within the meaning of IRC 414(d), is treated as having complied with IRC 401(a)(9) if the governmental plan applies a reasonable and good faith interpretation of IRC 401(a)(9). See Treas. Reg. 1.403(b)-6(e)(8). This rule also applies to a IRC 403(b) contract that is part of a governmental plan. See Treas. Reg. 1.401(a)(9)-1 Q&A-2(d).

  7. The required minimum distribution must be calculated separately for each IRC 403(b) contract.

    1. However, an employee who is a participant in more than one IRC 403(b) contract, with the same or a separate employer, may total the amounts required to be distributed from each and satisfy the minimum distribution requirement through distributions from one or more IRC 403(b) contracts. Treas. Reg. 1.403(b)-6(e)(7). Similarly, the employee may aggregate IRC 403(b) accounts held as a beneficiary of the same decedent for purposes of the minimum distribution requirement.

    2. IRC 403(b) contracts cannot be aggregated with IRAs or qualified plans for purposes of satisfying these minimums. See Treas. Reg. 1.403(b)-6(e)(7).

  8. If the issuer or custodian keeps the records necessary to identify the pre-1987 account balance, the minimum distribution commencement requirements apply only to benefits that accrue after December 31, 1986, including the income on pre-1987 contributions. See Treas. Reg. 1.403(b)-6(e)(6).

    1. Prior law (generally requiring distributions by the end of the calendar year in which the participant attains age 75) would apply to pre-1987 accruals.

    2. If records are not kept, the entire account balance is subject to IRC 401(a)(9).

    3. The minimum distribution incidental benefit (MDIB) requirement applies to the entire account balance, although prior law applies to the pre-1987 account balance in this regard under IRC 401(a)(9)(G). See Treas. Reg. 1.401(a)(9)-6, Q&A 2.

    4. If no actual amount is required to be distributed by April 1, 1988, because of these rules, the participant may treat December 31, 1988, as the RBD for all purposes under IRC 403(b)(10). See Treas. Reg. 1.403(b)-6(e)(6).

  9. An IRC 403(b) contract is treated as an individual retirement plan for purposes of satisfying the required minimum distribution rules. No reporting is required at this time with respect to required minimum distributions from IRC 403(b) contracts. See Notice 2002-27, 2002-1 CB 814 (April 16, 2002)

  10. The excise tax under IRC 4974 for failure to make minimum distributions applies to IRC 403(b) plans.

  11. Before assessing the tax, the agent should determine if reasonable cause exists. See IRC 4974(d) and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

4.72.13.15.3  (11-12-2014)
Hardship, Loans, and Qualified Domestic Relations Orders (QDRO)

  1. An IRC 403(b) plan may contain certain optional features that are consistent with but not required under IRC 403(b), such as

    • Hardship withdrawal distributions

    • Loans

    • Plan-to-plan or annuity contract-to-annuity contract transfers, and

    • Acceptance of rollovers to the plan

  2. Any optional provisions must meet, in both form and operation, the relevant requirements under IRC 403(b) and Treas. Regs. 1.403(b)-3 through 1.403(b)-11. See also Treas. Reg. 1.403(b)-3(b)(3)(i).

  3. A participant loan from an IRC 403(b) plan:

    1. Should have a fixed repayment schedule (See Treas. Reg. 1.403(b)-6(f)),

    2. Should bear a reasonable rate of interest (See Treas. Reg. 1.403(b)-6(f), and

    3. Is subject to the requirements of IRC 72(p) (See Treas. Reg. 1.403(b)-7(d)).

  4. Loans from plans that are subject to Title I of ERISA must also comply with section 408(b)(1) of Title I of ERISA and 29 CFR 2550.408b-1 of the Department of Labor regulations.

  5. Participants may take hardship distributions if the plan allows. A hardship distribution :

    • Has the same meaning as under Treas. Reg. 1.401(k)-1(d)(3)

    • Requires that the participant must stop making elective deferrals for six months after receipt of a hardship distribution.

    • Is limited to the amount of the participant's IRC 403(b) elective deferrals, not including any income thereon.

  6. IRC 414(p)(9) provides that a distribution from an IRC 403(b) plan pursuant to a qualified domestic relations order (QDRO) is treated in the same manner as a distribution from a plan to which IRC 401(a)(13) applies. If the plan is subject to Title I of ERISA, see also section 206(d)(3) of ERISA under which the prohibition against assignment or alienation of plan benefits under section 206(d)(1) of ERISA does not apply to an order that is determined to be a qualified domestic relations order.

4.72.13.15.4  (11-12-2014)
Distribution Requirements - Examination Steps

  1. Review the plan documents for form and timing of distributions.

  2. Review the employer's internal controls; procedures and documentation of plan distributions. Verify the individuals responsible for plan administration and record keeping.

  3. Document any information that may reveal substantial non-compliance.

  4. Request written clarification for any oral statements that appear to reveal areas of substantial non-compliance.

  5. Examine relevant records to corroborate oral testimony.

  6. Request participant account records, including hardship and loan requests, and Forms 1099-R.

  7. Examine payroll and personnel records to identify terminated individuals and those who are age 70 ½ or older.

  8. Identify any terminated participants who are age 70 ½ or older who did not receive a distribution.

  9. If it is determined that RMDs have not been paid timely, consider any correction remedies under Rev. Proc. 2013-12.

  10. Obtain and examine the records used to justify distributions made on account of hardship distributions, if any, and document the payments. Determine whether a hardship distribution occurred and that appropriate steps were taken to ascertain whether the payment was necessary considering other financial resources available to the participant.

    Note:

    Many vendors utilize web-based requests in lieu of paper requests, requiring a participant to self-certify their financial need and lack of other assets available to meet the financial need. Electronic records must be maintained in retrievable format per Treas. Regs. 1.401(a)-21(a)(3)(ii) which provides the requirements for a plan administrator/trustee to retain information for verification later. 29 CFR 2520 provides the DOL's requirements for retaining information.

  11. If the plan allows loans to participants:

    1. Verify and document that loans comply with IRC 72(p).

    2. Verify the interest rate was reasonable considering similar loans available through financial institutions.

    3. Document whether the safe harbor requirements in IRC 72(p)(2) were satisfied, document and explain the facts and circumstances of the loan, and determine whether the loan violates the distribution restrictions of IRC 403(b).

    4. Verify loan repayments are timely as required under IRC 72(p), and any defaulted loans have been reported as deemed distributions, and any subsequent loan following a default is paid through payroll reduction.

  12. Verify all other distributions are in accord with plan provisions.

  13. Verify Form 1099-Rs have been properly issued to report distributions, hardships and defaulted loans.

  14. If the plan allows for Roth contributions, verify distributions are in accordance with IRC 408A.

  15. IDRS research may be used to verify amounts paid were reported in gross income of the participant or beneficiary.

  16. Verify transactions involving the transfer of funds for the purchase of permissible service credits under a qualified defined benefit plan of a governmental employer are not more than the amount needed to purchase the service credit. See IRC 415(n).

4.72.13.16  (11-12-2014)
Transfers and Contract Exchanges

  1. Within certain limits, funds may be moved by transfer to another IRC 403(b) plan or exchanged within the same plan without being includible in gross income in the taxable year of the transfer or exchange.

  2. Transfers of funds between IRC 403(b) plans are permitted under Treas. Reg. 1.403(b)-10(b)(3), which states that in order to accomplish a plan-to-plan transfer the transferor and the transferee plan must:

    1. Both permit such a transfer;

    2. The participant must be an employee or former employee of the receiving plan;

    3. The transfer must not reduce the participant’s benefit; and

    4. The distribution restrictions of the plan that receives the funds are not less stringent than those under the transferor plan.

  3. There is no IRC requirement that a transfer from an IRC 403(b) plan or contract be permitted, or that an IRC 403(b) plan or contract have language to effect or accept a transfer (unlike direct rollover distributions).

  4. Transfers may also be made from an IRC 403(b) plan to a governmental defined benefit plan for the purchase of permissive service credits under IRC 415(n)(3) or repayments of cashouts under a governmental plan under IRC 415(k)(3). Although permissible, these plan sponsors are not required to provide for this. See IRC 403(b)(13) and Treas. Reg. 1.403(b)-10(b)(4).

    Note:

    If the State provides for the purchase of permissive service credits, language must be included in the plan document permitting this purchase, and the funds transferred must be used specifically to purchase permissive service credits that fall within the definition of IRC 415(n)(3).

  5. Treas. Reg. 1.403(b)-10(b)(2) provides that funds may be exchanged between annuity contracts or custodial accounts within the same IRC 403(b) plan. In order to accomplish such exchange:

    1. The plan document must specifically permit such an exchange;

    2. The exchange must not reduce the participant’s benefit;

    3. The distribution restrictions of the contract or custodial account that receives the funds cannot be less stringent that those under the contract being exchanged, and

    4. The employer and the contract issuer must enter into an information sharing agreement. See IRM 4.72.13.7.4.

  6. Transfers pursuant to Rev. Proc. 90-24 are no longer permissible under the IRC 403(b) Treasury Regulations.

4.72.13.16.1  (11-12-2014)
Rollovers

  1. In accordance with IRC 403(b)(8) and Treas. Reg. 1.403(b)-7(b), amounts may be distributed from an IRC 403(b) plan in an eligible rollover distribution (within the meaning of IRC 402(c)(4)). See Treas. Reg. 1.403(b)-10(d) for rules relating to a IRC 403(b) plan accepting rollover distributions.

  2. Distributions from an IRC 403(b) plan or contract are not currently includible in the employee's gross income if they are properly rolled over.

  3. The rollover rules of IRC 402(c) and the direct rollover rules of IRC 401(a)(31) apply to distributions from IRC 403(b) plans.

    1. All or a portion of the balance to the credit of the distributee must be paid to the employee in an eligible rollover distribution.

    2. The employee may roll any portion of the property he or she receives in the distribution to an IRA, another IRC 403(b) investment, an IRC 403(a) annuity plan, a qualified plan or an IRC 457(b) governmental plan.

    3. If property other than money is distributed and the property transferred is the same as the property distributed, then the distribution (to the extent transferred) shall not be includible in gross income for the taxable year in which paid.

    4. A proper rollover must be completed within 60 days of the employee's receipt of the distribution. The 60-day period may be waived by the IRS under certain circumstances. See Rev. Proc. 2003-16.

    5. Distributions not properly rolled over are currently includible in the employee's gross income and may be subject to additional tax under IRC 72(t).

    6. Unlike transfers, there must be a distribution event under the plan or contract to have an eligible rollover distribution.

  4. Under Treas. Reg. 1.403(b)-7(b), an eligible rollover distribution from an IRC 403(b) plan or contract is any distribution made to an employee of all or a portion of the balance to the credit of the employee, not including required minimum distributions, periodic distributions, or hardship distributions that occur after December 31, 1999.

    1. A direct rollover is an eligible rollover distribution from an IRC 403(b) plan or contract that is paid directly from the IRC 403(b) plan or contract to an IRA, another IRC 403(b) plan or contract, an IRC 403(a) annuity plan, a plan qualified under IRC 401(a), or an IRC 457(b) governmental plan.

    2. A direct rollover is both exempt from withholding and excludable from gross income. See Treas. Reg. 1.403(b)-7(b)(4).

    3. Unless made in the form of a direct rollover, all eligible rollover distributions are subject to 20 percent mandatory income tax withholding, even if they are subsequently properly rolled over (and thus excludable from gross income). See Treas. Reg. 1.403(b)-7(b)(4). The payor (i.e., insurer or custodian) is responsible for the withholding.

    4. If the amount distributed would be excluded from gross income if it were not rolled over, and such portion is to be rolled over to an eligible retirement plan that is not an IRA (i.e., a plan qualified under IRC 401(a) or another IRC 403(b) plan, the rollover must be accomplished in a direct rollover and it must be maintained in a separate account. See Treas. Reg. 1.403(b)-7(b)(1).

    Example 39: Employee X, age 59 1/2, received a $150,000 eligible rollover distribution from an IRC 403(b) plan on May 5, 2013. Twenty percent, or $30,000, was withheld by Payor. On June 20, 2013, Employee X rolled over $120,000 (the amount he actually received from Payor) to an IRA. The $30,000 withheld by Payor and not rolled over is subject to federal income tax for 2013. Employee X could have avoided income tax by making a direct rollover or rolling over the additional $30,000 from other funds.

    Example 40: The same facts as Example 39, except that Employee X elected a direct rollover of the $ 150,000 eligible rollover distribution. The $ 150,000 is not subject to withholding and is excludable from Employee X's gross income in the year of the rollover.

  5. Under IRC 403(b)(10) and IRC 401(a)(31), an IRC 403(b) contract is required to permit an employee to elect a direct rollover to an eligible retirement plan. See Treas. Reg. 1.403(b)-7(b)(2)&(3).

    1. The employee must also have a meaningful right to elect a direct rollover. See Treas. Reg. 1.403(b)-7(b)(3).

    2. Within a reasonable period of time prior to making the eligible rollover distribution, the payor must provide an explanation to the employee of his right to elect a direct rollover and the income tax withholding consequences of not electing a direct rollover. See Treas. Reg. 1.403(b)-7(b)(3).

  6. IRC 403(b) plans must be operated in compliance with the above rules. The plan document must reflect the direct rollover requirements. See Treas. Reg. 1.403(b)-7(b)(2).

  7. Special rules relate to a rollover from a grandfathered IRC 403(b) annuity contract purchased by an Indian tribal government. A grandfathered IRC 403(b) contract is one that is purchased by an Indian tribal government in a plan year beginning prior to January 1, 1995.

  8. In accordance with IRC 403(b)(10), an IRC 403(b) plan is required to IRC 401(a)(31) (including automatic rollover for certain mandatory distributions) in the same manner as a qualified plan. See Treas. Reg. 1.403(b)-7(b)(5).

4.72.13.16.2  (11-12-2014)
Transfers, Contract Exchanges and Rollovers - Examination Steps

  1. Review plan provisions regarding transfers, exchanges and rollovers.

  2. Request data regarding transfers and rollovers into or out of the plan.

  3. Examine distribution reports and Form 1099-Rs.

    • Form 1099-R is usually issued by the vendor or third party administrator.

    • Transfers, exchanges and direct rollovers are not reported on Form 1099-R.

  4. Distributions from the plan that are not direct rollovers should be researched on IDRS to determine if the reported distributions were taken into income.

  5. Verify that amounts received into the plan as rollover contributions are accounted for separately.

  6. Determine whether plan-to-plan transfers comply with Treas. Reg. 1.403(b)-10(b)(3).

  7. Request, review and verify information sharing agreements on contract exchanges.

  8. Verify compliance with direct rollover requirements of IRC 401(a)(31).

  9. Document whether the withholding and reporting requirements are met.

4.72.13.17  (11-12-2014)
Plan Terminations

  1. An IRC 403(b) plan may contain provisions allowing the plan sponsor to terminate the plan and make distributions. See Treas. Reg. 1.403(b)-10(a) and Rev. Rul. 2011-7.

  2. Termination of an IRC 403(b) plan involves the distribution of each participant’s accumulated benefit. Delivery of a fully paid individual insurance annuity contract is treated as a distribution. See Rev. Rul. 2011-7.

  3. Termination of the IRC 403(b) plan and the distribution of accumulated benefits is permitted only if the employer does not make contributions to any IRC 403(b) contract that is not part of the plan during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. See Treas. Reg. 1.403(b)-10(a)(1).

  4. There is an exception to the general rule as stated in paragraph (3). If for the period beginning one year before the date of the plan termination and one year after the date of the distribution of all assets from the plan, less than 2 percent of eligible employees are eligible under the alternative IRC 403(b) plan, the alternative IRC 403(b) contract is disregarded. See Treas. Reg. 1.403(b)-10(a)(1).

  5. Alternatively, an IRC 403(b) plan may contain provisions allowing the sponsor to freeze the plan by eliminating future contributions or by limiting participation to existing participants and employees. See Treas. Reg. 1.403(b)-10(a)(1).

    Note:

    The frozen plan is still required to meet the nondiscrimination requirements for IRC 403(b) plans. See Treas. Reg. 1.403(b)-10(a)(1) and Treas. Reg. 1.403(b)-5.

4.72.13.17.1  (11-12-2014)
Plan Termination - Examination Steps

  1. Review the plan document.

    1. Determine whether it contains provisions allowing for termination of the plan.

    2. Review all amendments to determine if an amendment terminating the plan has been adopted.

  2. Document whether distributions have been made to all participants as soon as is administratively practicable (generally within one year) following the date of termination.

  3. Document whether distribution of all accumulated benefits have been made to all the participants. In lieu of a distribution of cash, the termination may be accomplished by the delivery of a fully paid individual insurance annuity contract to the participant.

    Note:

    If distribution does not occur to all participants, the plan is not terminated and Form 5500 filing requirements may be applicable.

  4. Document whether the employer continues to be an eligible employer under IRC 403(b).

  5. In the case of an employer no longer eligible to maintain an IRC 403(b) plan, and where the plan has not been terminated, consider the ineligible employer remedy under EPCRS.

4.72.13.18  (11-12-2014)
Correction Programs

  1. When a determination is made that an IRC 403(b) plan is not in compliance with IRC 403(b) or the IRC 403(b) Treas. Regs., correction may be available through the correction programs outlined in Rev. Proc. 2013-12. These programs include:

    • Self Correction Procedure (SCP)

    • Voluntary Correction with IRS approval (VCP)

    • Correction on Audit (Audit CAP)

  2. For 2009 and later years, the following IRC 403(b) errors may be corrected under EPCRS:

    • Plan Document Failure

    • Demographic Failure

    • Operational Failure

    • Employer Eligibility Failure

    Note:

    Rev. Proc. 2008-50 applies to plan years prior to 2009 for correction of IRC 403(b) operational errors. A failure to follow the terms of an IRC 403(b) plan document that occurred prior to January 1, 2009, cannot be addressed unless the failure meets one of the operational failures outlined in Rev. Proc. 2008-50.

  3. Rev. Proc. 2013-12 provides guidance and information regarding correction principles through SCP, VCP and Audit CAP, along with fee schedules and guidance on sanction fees. At IRS website: http://www.irs.gov/Retirement-Plans/Correcting-Plan-Errors. The Rev. Proc., Topical Index, and Chart of Significant changes are available.

  4. Additional information can be obtained from the IRS web site at: http://www.irs.gov/Retirement-Plans/403(b)-Plan-Fix-It-Guide--403(b)-Plan-Overview.

4.72.13.18.1  (11-12-2014)
Self-Correction program (SCP)

  1. SCP allows an employer to self-correct certain insignificant operational errors at any time. Significant operational errors may be able to be self-corrected if action is taken within the time frame set forth in section 9 of Rev. Proc. 2013-12.

4.72.13.18.2  (11-12-2014)
Voluntary Correction Program (VCP)

  1. Voluntary Compliance Program (VCP) allows an employer who has established compliance practices and procedures, to correct a failure with IRS approval. Some failures must be corrected through VCP and are not eligible for self-correction.

  2. An employer cannot apply for the VCP program once the plan is under examination, as defined in section 5.09 of Rev. Proc. 2013-12.

4.72.13.18.3  (11-12-2014)
Correction on Audit (Audit CAP)

  1. Audit CAP for IRC 403(b) plans is available to correct all failures discovered on examination other than a failure that has been corrected under SCP or VCP or is eligible for correction under SCP. SCP is available for certain failures while the plan if Under Examination as defined in section 5.09 of Rev. Proc. 2013-12. See section 4.02 of Rev. Proc. 2013-22.

  2. Under Audit CAP, an employer and the IRS enter into a closing agreement specifying the form of correction and the sanction amount.

4.72.13.18.4  (11-12-2014)
Effect of Correction under EPCRS

  1. If the employer corrects a failure in accordance with the applicable requirements of SCP, VCP, or Audit CAP, the IRS will not treat the plan as failing to meet the requirements of IRC 403(b) because of the failure. For example, if the employer corrects a failure in accordance with the requirements ofRev. Proc. 2013-12, the plan will not be treated as failing to satisfy IRC 403(b), as applicable, for purposes of applying FICA and FUTA taxes.

  2. In appropriate cases, certain excise taxes may be waived under EPCRS. See Section 6.09 of Rev. Proc. 2013-12.

  3. The issuance of a compliance statement or closing agreement under EPCRS for the failure to adopt a written IRC 403(b) plan timely will result in the written IRC 403(b) plan being treated as if it had been adopted timely for the purpose of making available the extended remedial amendment period set forth in Rev. Proc. 2013-22. However, the issuance of a compliance statement or closing agreement does not constitute a determination as to whether the written plan, as drafted, complies with the applicable requirements of IRC 403(b) and the IRC 403(b) Treas. Regs. See sections 2.03, 5.02 and 6.10 of Rev. Proc. 2013-12.

4.72.13.18.5  (11-12-2014)
Examination Use of EPCRS

  1. Each area has an IRC 403 and IRC 457 Area Coordinator who can assist with development of issues and correction methods.

  2. Issues found during an audit should be corrected using the guidance under Rev. Proc. 2013-12.

  3. If, during an examination, it is found that the plan sponsor has corrected a failure through EPCRS:

    1. If the employer has made self-correction through SCP, verify that the method of correction was appropriate and timely

    2. If a failure has been corrected through VCP, review the compliance statement and verify that the correction was properly and timely. Review and verify the accuracy of the correction if it applies to the year under examination. For example, if a failure is corrected through VCP, the correction must be implemented within 150 days of the date of the compliance statement, unless additional time was provided under the compliance statement.

    3. Check to see if there are any failures or years that fall outside of the scope of the compliance statement or closing agreement.

    4. If a written plan has been adopted through EPCRS, confirm that the written plan, as drafted, complies with the applicable requirements of IRC 403(b) and the Final IRC 403(b) Regulations.

    5. Secure any Form 5330 returns due and the payment of any excise taxes, if applicable.

    .


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