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Employee Plans Compliance Unit (EPCU) – Non-Governmental 457(b) Plans Project

Federal law permits tax-exempt entities to sponsor non-qualified deferred compensation plans for select groups of highly compensated employees, managers, directors or officers. These plans, allowed under Internal Revenue Code Section 457(b), are often referred to as “Top Hat” plans.

Why did I receive an EPCU compliance check letter?

Our records show that you filed Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan (often referred to as a “Top Hat” plan) and also filed Form 990.

What actions do I need to take?

Please provide a timely response to the request for information. If you don’t have a non-governmental 457(b) plan or if you believe for any other reason that you shouldn’t have been contacted, please contact us and explain your circumstances.

You may furnish other documents or clarifying material that you believe will be helpful for us to review. Please answer the questions as completely and accurately as possible.

This letter initiates a compliance check. We will not inspect your books and records to determine a filing liability for a particular tax period. If you don’t respond, however, we may need to take other measures to ensure compliance, including an audit of your plan or organization.

What is EPCU attempting to determine?

Our project goals are to:

  • learn more about the operation of non-governmental 457(b) plans,
  • verify that the plans comply with the Internal Revenue Code requirements,
  • identify issues of noncompliance, and
  • recommend ways to remove any barriers to compliance.

We’ll correspond with plan sponsors to solicit information about the characteristics and features of their plans, including contributions and employer and employee eligibility.

We’ll focus on the following issues:

  1. verify that the deferrals reported on the sponsors’ Forms W-2 represent a 457(b) plan;
  2. determine if the plan sponsor is eligible to have a 457(b) plan, and, if eligible, whether the sponsor is:
    • a governmental unit,
    • exempt from income tax under IRC Section 501(c), or
    • a ‘dual status’ entity that is both governmental and exempt under 501(c);

  3. verify that participation in the plan is limited to a select group of highly compensated employees, managers, directors or officers;
  4. determine whether the plan contains features not permitted in a top hat plan, such as:
    • loans,
    • age 50 catch-up provisions, or
    • contributions placed in a trust for the exclusive benefit of participants; and

  5. determine whether unforeseeable emergency distributions have been made.

In instances where a plan isn't established or operated in accordance with IRC Section 457(b), we will inform the sponsor what actions are needed, which may include an audit of the plan or correction under the Voluntary Correction Program. Submissions relating to IRC 457(b) will be accepted by the IRS on a provisional basis outside of EPCRS through standards that are similar to EPCRS. Corrections accepted by the IRS will be on a facts and circumstances basis. See Revenue Procedure 2013-12 Section 4.09.

EPCU plans to send compliance check letters and questionnaires to approximately 200 organizations in IRS fiscal year 2013 (ending 9/30/2013) and another 200 in fiscal year 2014 (ending 9/30/2014) as part of this review.

If You Have Questions

Review the resources provided below. Also, feel free to email us and we will be glad to answer any questions you have about the project and how it relates to you. Please include “Top Hat” in the subject line of the message. We regret that we cannot respond to technical questions unrelated to your compliance check.

Additional resources

Page Last Reviewed or Updated: 28-Jul-2016