403(b) Plan Fix-It Guide - For a 403(b) plan offering a 5-year post severance provision, elective deferrals are permitted under the provision

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8) For a 403(b) plan offering a 5-year post severance provision, elective deferrals are permitted under the provision. Understand how this feature works and seek the help of a retirement plan professional, if needed. Distribute excess 415(c) contributions. Report corrections on Form 1099-R. Consider using the services of a retirement plan professional. Know how the feature works and keep good records.

Five-year post severance contributions are employer contributions made to a 403(b) plan after the employee’s severance from employment. In general, post severance contributions must meet the following:

  • Employer contributions may be made for an employee for up to 5 years after the employee’s employment ends.
  • Post severance contributions must be based on includible compensation for the employee’s last year of service.
    • Includible compensation doesn’t include amounts contributed by the employer to the employee’s 403(b) account.
    • Compensation for an employee working less than full-time should include a time period that would constitute a year of service.
       
  • Contributions may be made up to the limits under Internal Revenue Code Section 415 for each of the 5 years.

How to find the mistake:

If your 403(b) plan offers post severance contributions, it’s important you understand how this feature works. It’s likely you’ve already sought the help of a retirement plan professional. Post severance contributions should have an outside review of the eligibility and contribution calculations.

How to fix the mistake:

Example:
ABC College properly maintains a 403(b) plan with 5-year post severance contributions. After separation from employment, employees will have a contribution made to the plan in an amount equal to the highest compensation the employee received during the previous three years. During a compliance review of the plan for the 2015 year; ABC noted that employee, Sue, had an employer contribution of $40,000 per year made to its 403(b) plan for each of 5 years after termination from service (2012 – 2016); however, Sue’s final year of compensation was only $35,000. The result is Sue received an extra $5,000 contribution for each of those 5 years. ABC discovered the error in 2017. However, as of December 31, 2018 no action was taken to correct the failure. Currently, the plan has 48 participants and the total value of annuity contracts, and or, custodial accounts associated with the plan does not exceed $500,000.

Correction programs available:

Self-Correction Program:

If ABC determines it has the proper practices and procedures in place and the mistake was insignificant, ABC may use SCP to fix this mistake. Insignificant failures can be corrected at any time. If ABC deemed the failures to be significant, SCP wouldn’t be available because correction would be occurring beyond the 2-year timeframe that is available to correct significant operational failures.

Voluntary Correction Program:

ABC may correct this mistake under VCP if they or the plan isn't under audit. This is an Internal Revenue Code Section 415 failure so the following correction methods would be available:

  • ABC should remove the accumulated $25,000 from Sue’s 403(b) account and place it into a taxable 403(c) account. This would generate a taxable event to Sue and would require ABC to issue a W-2 or 1099-R.
  • If the extra payments made were not consistent with the plan’s written terms, ABC could request that Sue return the payment since the plan’s terms did not authorized it.

ABC would make a submission per Revenue Procedure 2018-52 to correct under VCP. The user fee for ABC’s 2019 VCP submission (based on the value of assets associated with the 403(b) plan) is $1,500. VCP user fees may change in subsequent years. ABC can make its VCP submission using Form 14568,  Model VCP Compliance Statement.

Audit Closing Agreement Program:

Under Audit CAP, correction of this mistake is the same as described above. ABC and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances; bear a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2018-52.

How to avoid the mistake:

If your plan contains these features, you should consider using the services of a retirement plan professional to help avoid mistakes. As usual, knowing how the feature should work and keeping good records are essential to keeping your plan in compliance.

403(b) Plan Fix-It Guide
EPCRS Overview
403(b) Plan Checklist (.pdf)
Additional Resources

IRS.gov / Retirement Plans / Correcting Plan Errors / Fix-It Guides / Potential Mistake