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Webinar: Dept. of Labor 401(k) Audits – How Not to Get Selected (and How to Survive if You Do) UPDATED

 Please join Christine Roberts and former DOL investigator David Kahn for a free, one-hour webinar on Wednesday, Aug 24, 2016 at 10:00 AM PDT which will provide tips on how to reduce the risk of audit, and how to survive an audit if one occurs. We will cover investigation triggers and issues that the DOL targets once an audit is underway. This no-charge webinar qualifies for continuing education credits for California CPAs and ASPPA. Join us for a webinar. Register now! https://lnkd.in/b-58niA

For those of you who missed the event, the PowerPoint and audio file are found here.

IRS Announces Increased 2015 Retirement Plan Contribution Limits

On October 23, 2014 the IRS announced 2015 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   A 1.7% rise in the September CPI-U over 2013 triggered $500 increases to the annual maximum salary deferral limit for 401(k) plans, and the catch-up limit for individuals age 50 or older. Citations below are to the Internal Revenue Code.

Limits That Increase for 2015 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $17,500, increases $500 to $18,000.

–The age 50 and up catch-up limit also increases $500, to $6,000 total. This means that the maximum plan deferral an individual age 50 or older in 2015 may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) increased from $52,000 to $53,000 ($59,000 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(a)(17) increased from $260,000 to $265,000.

–The compensation threshold for determining a “highly compensated employee” increased from $115,000 to $120,000.

–The compensation threshold for SEP participation increased from $550 to $600.

–The SIMPLE 401(k) and IRA contribution limit increased $500 to $12,500.

–The Social Security Taxable Wage Base for 2015 increased from $117,000 to $118,500.

Limits That Stayed The Same for 2015 Are As Follows:

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The maximum annual benefit under a defined benefit plan remained at $210,000.

 

IRS Announces 2014 Benefit Limits

On October 31, 2013 the IRS announced 2014 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The announcement had been delayed until the September 2013 Consumer Price Index for Urban Consumers (CPI-U) was available, which in turn was delayed by the government shutdown over the budget and debt ceiling debate.   A modest 1.2% rise in the September CPI-U over 2013 left a number of the dollar limits unchanged for 2014, although a few limits have increased (citations are to the Internal Revenue Code).
Some limits that did not change for 2014 are as follows:
–Salary Deferral Limit for 401(k), 403(b), and 457 plans remains unchanged at $17,500. The age 50 and up catch-up limit also remains unchanged at $5,500 for a total contribution limit of $23,000.
–The compensation threshold for “highly compensated employee” remained at $115,000 for a second year in a row.
–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.
–SIMPLE 401(k) and IRA contribution limits remain at $12,000.
Limits that did increase are as follows:
–Maximum total contribution to a 401(k) or other “defined contribution” plans under 415(c) increased from $51,000 to $52,000 ($57,500 for employees aged 50 and older).
–Maximum amount of compensation on which contributions may be based under 401(1)(17) increased from $255,000 to $260,000.
–Maximum annual benefit under a defined benefit plan increased from $205,000 to $210,000.
–Social Security Taxable Wage Base increased from $113,700 to $117,000.
–The dollar limit defining “key employee” in a top-heavy plan increased from $165,000 to $170,000.

Roundup of DOMA Guidance re: Benefit Plans

The Internal Revenue Service and Department of Labor have in recent months issued initial guidance to employers on the benefit plan consequences of the U.S. Supreme Court’s June 2013 decision in U.S. v. Windsor, 133 S.Ct. 2675 (2013), which ruled Section 3 of the federal Defense of Marriage Act (“DOMA”) to be unconstitutional on equal protection grounds.  That now defunct DOMA provision limited the federal law definitions of “marriage” and “spouse” to refer only to unions between members of the opposite sex.

The recent guidance, which I summarize below (and have separately addressed in earlier posts), represents early stages in the process of fully implementing the US v. Windsor holding within ERISA’s extensive compliance regime.  Please note that this post focuses on the federal tax consequences of same-sex benefits; state taxation of such benefits, and those provided to domestic partners, depends upon the revenue and taxation laws of each state.

IRS and DOL Adopt “State of Celebration” Rule

In U.S. v. Windsor the Supreme Court held that federal law will recognize all “lawful marriages” between members of the same sex, but left open the question of which state’s law will determine whether a same-sex marriage is lawful:  the state of domicile (where the married couple lives), or the state of “celebration” (where the marriage took place).

This is an important question because the Supreme Court decision left intact Section 2 of DOMA, under which a state, territory or Indian tribe need not give effect to another state’s laws regarding same-sex marriage.  The “state of domicile” rule, if it determined whether or not a same-sex couple was legally married, could cause benefits chaos.  For instance, an employer with operations in multiple states would be required to track where each employee in a same-sex relationship lived, and possibly modify their benefit offerings if they moved from a state that recognizes same-sex marriage, to a “non-recognition” state.

Note:  As of the date of this post, the District of Columbia and 14 states recognize same-sex marriage: California (since June 28, 2013, also prior to November 5, 2008); Connecticut; Delaware (eff. 7/1/2013); Iowa; Maine; Maryland; Massachusetts; Minnesota (eff. Aug. 1, 2013); New Hampshire; New Jersey (eff. October 21, 2013); New York; Rhode Island (eff. Aug. 1, 2013); Vermont; and Washington.  (Follow updates to this list here.)

The U.S. v. Windsor ruling also gave rise to some confusion over the status, under federal law, of domestic partnerships, civil unions, and other formalized same-sex relationships that fall short of marriage.

Fortunately, both the IRS and the DOL have resolved these issues in separate guidance released in September 2013.

Specifically, in Revenue Ruling 2013-17, the IRS announced that:

  • The IRS will recognize, as a legal marriage for all federal tax purposes, a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction that recognizes same sex marriage, regardless of where the couple lives.
  • Under federal tax law, the terms “husband,” “wife,” “husband and wife,” “marriage” and “spouse” includes lawful same-sex marriages and individuals in such marriages.
  • “Marriage” for federal tax purposes does NOT include domestic partnerships, civil unions, or other formal relationships falling short of marriage.

To reach these conclusions the IRS invoked a prior Revenue Ruling from 1958 (Rev. Rul. 58-66) that held that individuals who became common-law spouses under state law were entitled to be treated as legally married spouses for federal income tax purposes regardless of where they later resided.

The DOL also adopted the “state of celebration” rule for purposes of defining same-sex marriage under ERISA benefit plans, including retirement plans, in Technical Release 2013-14.  In this guidance, published September 18, 2013, the DOL also specifies that the terms “spouse” and “marriage,” for ERISA purposes, do not include domestic partnerships or civil unions, whether between members of the same sex or opposite sex, regardless of the standing such relationships have under state law.

The IRS ruling takes effect September 16, 2013 on a prospective basis.  The DOL Technical Release should be treated as effective immediately on a prospective basis.  The DOL will issue further guidance explaining any retroactive application of the U.S. v. Windsor ruling under ERISA, for instance with regard to previously executed beneficiary designations, plan distribution elections, plan loans and hardship distributions.

Other Tax Guidance from Revenue Ruling 2013-17 and FAQs

Revenue Ruling 2013-17 also contains guidance on prospective and retroactive tax filing aissues resulting from the U.S. v. Windsor decision, including refund/credit opportunities.  More specific guidance for taxpayers is set forth in separate IRS FAQs for same-sex married couples, and for couples in registered domestic partnerships.

In order to understand  the tax refund/credit procedures it is helpful first to review the federal tax consequences of providing employment benefits to same-sex spouses while Section 3 of DOMA remained in effect.

Through Internal Revenue Code (“Code”) Section 105(b), Federal law has long allowed employers to provide health and other benefits on a tax-free basis to employees, their opposite-sex spouses and dependents.  However, under DOMA § 3, the same benefits provided to same-sex spouses and other partners generally resulted in “imputed incometo the employee for federal tax purposes, in an amount generally equal to the value of the benefits provided.  Similarly, employees could not use Sec. 125 cafeteria plans to pay premiums for same-sex spouses/partners on a pre-tax basis.  Only in rare instances where the same-sex spouse was a dependent of the employee spouse as a result of disability, did same-sex spousal coverage not result in an additional federal tax burden to the employee spouse.

Note that benefits provided to domestic partners and partner in civil unions are still treated this way for Federal tax purposes.  For benefits provided to employees who are lawfully married to same-sex spouses, however, the new rules effective September 16, 2013 and prospectively are as follows:

  • Individuals in lawful same-sex marriages must file their federal income tax returns for 2013 and subsequent years as either married filing jointly, or married filing separately.
  • Employer-provided benefits provided to an employee’s lawfully-married same-sex spouse are excludable from the employee’s income for federal tax purposes.
  • As a consequence, employers must stop imputing income to employees, for federal tax purposes, based on same-sex spousal benefits, and must adjust affected employees’ Form W-2 income for 2013 to remove imputed income amounts.
  • The tax-qualified benefit plans that are affected are:
    • health, dental and vision coverage;
    • qualified tuition reduction plans maintained by educational organizations;
    • meals and lodging provided to employees on business premises (other specific conditions apply);
    • fringe benefit including qualified transportation fringe benefits, moving expenses, employee discounts, and work-related expenses; and
    • pre-tax participation in Section 125 cafeteria/flex plans, including health flexible spending accounts and dependent care flexible spending accounts.
  • Employees in lawful same-sex marriages can file amended personal income tax returns for “open” tax years (generally 2010, 2011, 2012) to recoup over-withheld federal income taxes resulting from imputed income and after-tax cafeteria plan participation.
  • However, if they re-file, they must re-file as married for all tax purposes, not just to obtain the refund or credit.  In many cases, the income tax adjustment will not warrant the loss of other deductions.  Employees must consult their individual CPAs and other tax advisors for answers; employers must refrain from offering any specific advice or guidance in this regard.

Corrective Payroll/Withholding Steps for 2013 and Prior “Open” Tax Years

IRS Notice 2013-61, published September 23, 2013, sets forth optional, streamlined ways for employers to claim refunds of over-withheld “employment taxes” (FICA and federal income taxes) applied to imputed income/same sex spouse benefits in 2013, and prior “open” tax years.

The “normal” over-withholding correction process – which remains available to employers in this instance – varies slightly depending on whether or not the employer is seeking an adjustment of withholding taxes, or a refund of withholding taxes, but generally includes the following steps:

  • identify the amount of over-withholding;
  • repay the employee’s portion to the employee in cash (or “reimburse” them by applying the overpayment to FICA taxes for current year);
  • obtain written statements from affected employees that they will not also claim a refund of over-withheld FICA taxes, and if an employer is seeking a refund of over-withheld taxes, obtain affected employees’ written consent to the refund; and
  • file IRS Form 941-X for each quarter affected, to recoup the employer portion of the tax.

Notice 2013-61 sets forth two streamlined correction methods permitting use of one single Form 941 or Form 941-X for all of 2013.  Under the first method, the employer takes the following steps before the end of the current year:

  • identify and repay/reimburse employees’ share of excess income tax, FICA tax withholdings resulting from same-sex spousal benefits on or before December 31, 2013; and
  • make corresponding reductions in affected employees’ wage and income-tax withholding amounts on the 4th quarter 2013 Form 941.

The second method is available if the employer does not identify and repay/reimburse employees’ share of excess income tax, FICA tax withholdings until after December 31, 2013.  In that case the employer:

  • Files one single Form 941-X in 2014 seeking reimbursement of employer’s share of tax with regard to imputed income for same-sex spouse benefits reported in all quarters of 2013.
  • In addition to the regular Form 941-X filing requirements, including obtaining written statements and/or consents from employees, employers must write “WINDSOR” at the top of the Form 941-X and must file amended Form W-2s (IRS Form W-2c) for affected employees, reporting the reduced amount of wages subject to FICA withholding.

Note:  This second correction method can apply only to FICA taxes.  Employers cannot make adjustments for overpayments of income tax withholding for a prior tax year unless an administrative error (e.g., wrong entry on Form 941) has occurred.

Employers may also recoup their share of FICA taxes for earlier open tax years (generally, 2010, 2011 and 2012) using one Form 941-X for all four calendar quarters that is filed for the fourth quarter of each affected year.  In addition to marking the Form “WINDSOR” the employer must also file amended Form W-2s for affected employees, reporting the reduced amount of wages subject to FICA withholding.

Employers making use of the correction methods set forth in IRS Notice 2013-61 for 2013 or earlier open years must take account of the Social Security Wage Base in effect for applicable years.  For employees whose 2013 compensation exceeds the taxable wage base ($113,700) even after imputed income is eliminated, no corrections for the Social Security component of FICA taxes can be made.  If retroactive corrections are made, you must observe the SS wage base limitations in effect in prior years:  $106,800 for 2010 & 2011, and $110,100 for 2012.

One final note:  many employers that provide benefits to employees’ domestic partners and/or same sex spouses have followed a practice of grossing up the employees’ taxable compensation to account for the additional federal taxes they must pay on imputed income.  The IRS guidance on recouping over-withheld taxes apply only to imputed income amounts, not to the gross-up amounts.  “Normal” over-withholding correction procedures using Forms 941 and 941-X should apply to 2013 gross-up amounts but employers should consult their payroll and tax advisors for specific advice.  Note also that California recently adopted a law that will exclude gross-up amounts from employees’ taxable compensation for state personal income tax purposes.  AB 362 takes immediate effect and is slated to expire January 1, 2019.  You can find a fuller discussion of the measure here.

COLA Increases Raise 2013 Contribution Limits

An almost 3.3% cost of living increase in the Social Security wage base for 2013 has triggered increases in annual contribution and other dollar limits affecting 401(k) and other retirement plans, the Internal Revenue Service announced on October 18, 2012.  Here are some of the key changes for 2013 (citations are to the Internal Revenue Code):

–Salary Deferral Limit for 401(k), 403(b), and 457 plans increased from $17,000 to $17,500. (The age 50 and up catch-up limit remains unchanged at $5,500, however.)

–Maximum total contribution to a 401(k) or other “defined contribution” plans under 415(c) increased from $50,000 to 51,000 ($56,500 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(1)(17) increased from $250,000 to $255,000.

–Maximum annual benefit under a defined benefit plan increased from $200,000 to $205,000.

–Social Security Taxable Wage Base increased almost 3.3% from $110,100 to $113,700.

–The IRA contribution limit increased from $5,000 to $5,500.  The catch-up limit remains at $1,000, however.

–Note also that the annual exclusion from gift taxes will increase in 2013 from $13,000 to $14,000.

Some limits that did not change for 2013 are as follows:

–The compensation threshold for “highly compensated employee” remained at $115,000.

–The dollar limit defining “key employee” in a top-heavy plan remained at $165,000.

401(k) Fee Disclosure Deadlines Extended Three Months; Other Changes Made in Final Regulations Under ERISA 408(b)(2)

On February 2, 2012 the Department of Labor issued a final rule under ERISA Section 408(b)(2), governing disclosures that plan service providers must make to plan fiduciaries to allow them to confirm that the providers receive only “reasonable” amounts of compensation from plan assets in exchange for their services. The types of providers affected include Registered Investment Advisors, certain broker-dealers, third party administrators, and other service providers receiving $1,000 or more in direct or indirect compensation from plan assets. The rule extends the deadline for the initial disclosure three months, from April 1, 2012 to July 1, 2012.

The plan-level fee disclosure rules originally issued in July 2010 with a one-year deadline for implementation deadline, but that deadline was extended to April 1, 2012 last July. This is probably the last such extension (though anything is possible in an election year).

There is no prescribed manner of providing the required disclosures other than that it is in writing. Because compensation information may be conveyed through multiple or complex documents, the final rule includes a placeholder for rules on a “guide or similar tool” that would help fiduciaries locate information in disparate sources. An appendix to the final rule also includes a Sample Guide to get service providers working towards a disclosure roadmap.

Another significant change in the final rule is that it carves out, from plans that are covered by the disclosure rule, “pre-2009” 403(b) annuity contracts or custodial accounts that meet all the requirements set forth in DOL Field Assistance Bulletins 2009-02 and 2010-1 providing limited relief from Form 5500 reporting duties. More information on how to identify a pre-2009 contract or account is found in the FABs.

Failure to comply with the fee disclosure requirements constitutes a prohibited transaction (PT) for the responsible fiduciary, whereas compliance qualifies the fiduciary for a PT exemption. The final rule changes one of the conditions for the PT exemption when a service provider has failed to provide compensation information and also has not responded to the fiduciary’s written request for the information within 90 days. If the information relates to futures services and is not disclosed promptly after the 90-day period, the final rule requires the fiduciary to terminate the service arrangement “as expeditiously as possible.”

The final rule cuts service providers some slack, however, allowing them to provide “reasonable and good faith estimates” of compensation or cost amounts that are difficult to itemize, so long as the service provider explains the methods and assumptions it used to arrive at the estimate.

Additionally, disclosures of indirect compensation paid by third parties to the service provider must be accompanied by a description of the arrangement between the service provider and the third party pursuant to whom the payments are made.

The three-month extension of the plan-level fee disclosure rule triggers an equal extension of the participant-level fee disclosure rules under ERISA Section 404(a)(2). Technically plan sponsors (employers) must make these disclosures to plan participants, but for practical purposes institutional investment providers will provide most of the content. The deadline to distribute the initial written disclosure has moved from May 31, 2012 to August 30, 2012, and the deadline to distribute the first quarterly statement under the rule has moved from August 14, 2012 to November 14, 2012.

Treasury Department Issues Guidance Easing Access to Lifetime Payout Options

On February 2, 2012 the Treasury Department issued guidance aimed at easing employee access to lifetime payout options from 401(k) and other defined contribution plans (IRAs and IRA-based arrangements are exempt) A link to the related fact sheet is here, and proposed regulations and a Treasury/IRS ruling will follow with more details. (An advance copy of the proposed regulation is available here.)

The Department’s fact sheet outlines the reason for the initiative – the “longevity risk” that results from increased life spans and the prevalence of lump-sum retirement plan distributions in the post-defined benefit plan era. Through a request for public comments, the Department gathered data and studied ways in which current provisions of the Internal Revenue Code discourage plan participants from choosing life annuity and other incremental payout options. The guidance package outlines both the regulatory barriers that they identified, and their proposals to make lifetime income options more accessible and popular among plan participants. The proposed changes are as follows:

1) To correct the “all or nothing” choice between a lump sum or an annuity payout, proposed regulations will simplify the manner of calculating a distribution that is part lump sum, part annuity, so that plans are more likely to offer this blended form of distribution;
2) To address retirees’ fears of outliving required minimum distribution payments that generally must begin at age 70 ½, proposed regulations would allow use of up to 25% of an IRA or 401(k) account balance (or $100,000, if less) to purchase a “longevity annuity” that will begin payment by age 85.
3) To expand access to cost-effective annuity forms of payout under the relatively few remaining defined benefit pension plan, a Treasury/IRS ruling will explain permit full or partial rollovers from a 401(k) plan, to a defined benefit pension plan sponsored by the same employer, in exchange for an immediate annuity from that plan.
4) To aid employers and third party administrators who are unsure of how spousal consent rules work in relation to deferred annuities, including longevity annuities, a Treasury/IRS ruling will identify plan and annuity terms that will automatically protect spousal rights without requiring spousal consent before the annuity begins, shifting the spousal consent compliance to the insurer issuing the annuity. (Many if not most 401(k) plans have opted out of rules requiring spousal consent under ERISA, however many investment providers in community property states require spousal consent to any loans or distributions.)

COLA Increases Raise 2012 Contribution Limits

A 3.6% Social Security cost of living increase for 2012 has triggered increases in annual contribution and other dollar limits affecting 401(k) and other retirement plans, the Internal Revenue Service announced on October 20, 2011. These dollar limits were static from 2009 through 2011 due to the floundering economy. Here are some of the key changes (citations are to the Internal Revenue Code):

–Salary Deferral Limit for 401(k), 403(b), and 457 plans increases from $16,500 to $17,000. (The age 50 and up catch-up limit remains unchanged at $5,500, however.)

–Maximum total contribution to a 401(k) or other “defined contribution” plans under 415(c) increased from $49,000 to $50,000 ($55,500 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(1)(17) increased from $245,000 to $250,000.

–Compensation threshold for “highly compensated employee” increased from $110,000 to $115,000.

–Dollar limit defining “key employee” in a top-heavy plan increased from $160,000 to $165,000.

–Maximum annual benefit under a defined benefit plan increased from $195,000 to $200,000.

–Social Security Taxable Wage Base increased from $106,800 to $110,100.

–IRA contribution and catch-up limits remain $5,000 and $1,000, respectively.

Your 401(k) Plan’s Online Report Card — and What to do About It

Since 2009, a company called Brightscope has been compiling data on plan assets from retirement plan tax returns (Form 5500s) and providing on-line “scores” on plan investment performance, as measured against industry peers. I am surprised how often clients and even colleagues in the benefits world are unaware that this data is publicly available, and not just for larger ($10 million + in assets) retirement plans.

That is because, in addition to “scoring” retirement plan investment performance (including the impact of administrative and investment expenses), Brightscope translates poor investment performance into what it “costs” a hypothetical plan participant, in real dollar terms.

So, for instance, the Brightscope rating for a plan with a performance score of “60” as measured against its top-rated industry peer’s score of 84 will also state that this 24-point lag in scoring will “cost the average 401(k) plan participant” an additional 10 years of work, and up to $67,000 in lost retirement savings. Brightscope separately explains its statistical methodology, which assumes an “average participant” who is a 44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000. However readers have to dig a bit for this information, and in the mean time the initial negative impact the numbers could make on a plan participant is considerable.

Brightscope also invites those “average 401(k) plan participants” who are not happy about their plan’s performance to “Help Improve this Plan” (by contacting the employer and other participants) and “Track this Plan” (by receiving updated plan performance data). It also provides a summary of participants’ legal rights under ERISA.

Needless to say, Brightscope is packaging information in a way that invites employees to challenge employers about plan investment performance, fees, and plan design. This is a timely development given the Department of Labor’s current (long-overdue) focus on fee disclosure regulations at both the plan- and participant-level. In fact some of the information Brightscope shares has always been required to be communicated to employees annually under existing Department of Labor regulations, in the form of a Summary Annual Report (SAR). Obviously, Brightscope is a boon to employers whose plans are at or near the top score for their respective industry. But what does it mean for employers whose plans are at the other end of the spectrum? If handled properly, a low Brightscope rating does not have to be an employee-relations disaster.

First, I recommend that clients periodically check their plan’s information on Brightscope. Originally only larger plans with $10 million in assets or more were rated, but Brightscope is adding ratings on smaller plans every day. (And for smaller plans without a rating, Brightscope conveniently summarizes information from the plan’s latest Form 5500 data, including beginning- and end-of-year plan asset totals, and responses to questions about fiduciary breaches.)

Second, employers can challenge the methods by which Brightscope derives its ratings (by following prcedures described in the FAQ) and this is appropriate to correct an obvious error in plan data. Absent that, however, I don’t think it is helpful for an employer with a low rating to go on the defensive this way. It is better for the employer to confront the low score head-on, share their Brightscope rating with their investment advisor, and take steps to address the source problem, which may be higher than average costs/fees, low-performing mutual funds, or both. It won’t be possible to immediately close a 20-point gap in scoring, but it is possible to answer complaints on the current score by saying that the company is aware of it and is taking steps to improve the situation.

For more information about how Brightscope came about, other ventures its founders are working on, and its perception in the retirement plan industry, I recommend this New York Times article.

IRS Questionnaire Sent to College, University Plans Does Not Put Plans “Under Examination” but EPCRS Availability Remains Unclear

The IRS Employee Plans Compliance Unit (“EPCU”) is in the process of sending over 300 written questionnaires to a random sample of small, medium, and large institutes of higher education, including private and public colleges, universities, and trade and vocational schools. The questionnaire – on IRS Form 886-A – contains 18 separate questions but mainly focuses on one issue: whether the organization’s Section 403(b) plan satisfies the “universal availability” requirement. Under that rule, if one employee has the opportunity to defer a portion of salary under the plan, then generally all employees must be offered the same opportunity. (Very limited exceptions apply.) The questionnaire seeks to identify plans that are not making the deferral opportunity universally available, either because the limited exceptions are misapplied, or the employer imposes additional conditions on deferring that are not permitted under law. A number of the questions refer specifically to exclusion of groups of employees unique to educational organizations, such as medical residents, and different categories of instructors, professors or lecturers. An IRS announcement on the project as well as links to the questionnaire, instructions for filling out same, and a glossary of terms, can be found here.

Organizations have 25 days to complete and return the questionnaire by fax, mail or e-mail. Upon review of the questionnaire, the IRS will either deem a plan to be compliant and issue a “closing letter,” or will request additional information from the organization. If a problem is found the IRS will work with the organization to correct it, for instance by making fully vested employer contributions to restore the lost opportunity to make tax deferrals in prior plan years. (Generally the employer contribution requirement is equal to half of the deferral the employee would have made (the “lost opportunity” cost), but specific correction methods are not set forth in the questionnaire or in the IRS announcement of the program. Correction methods will be specified in a follow-up letter sent to organizations whose initial responses require follow-up.

Receipt of the questionnaire will not mean that a plan sponsor is “Under Examination” and thus barred from using the Voluntary Correction Program under the Employee Plans Compliance Resolution System (“EPCRS”) to correct 403(b) operational errors currently identified in EPCRS (for instance, failure timely to implement an employee’s salary deferral election). This was confirmed by the IRS, with regard to a similar 401(k) questionnaire project, in a recent issue of Employee Plans News. That said, the current version of EPCRS, set forth in Revenue Procedure 2008-50, does not provide as many corrections for Section 403(b) plans as are available to other types of qualified plans, largely because Rev. Proc. 2008-50 was drafted before Section 403(b) plans were required to be set forth in writing. For instance, VCP is not available for sponsors that lack a written Section 403(b) plan document or that have failed to operate the plan in accordance with its written terms, nor is it available for employer eligibility failures. The IRS is expected later this year to release an updated version of EPCRS that covers Section 403(b) corrections in greater detail. However, it is not known whether or not the new Revenue Procedure will contain relief for sponsors that failed to timely put a plan document in place or failed to operate a plan in accordance with its written terms.

Tax-exempt employers who receive a questionnaire strongly are advised to consult with their professional tax advisors before submitting a response to the IRS. An incorrect response – or an accurate response – could trigger potential contribution and tax liability on a significant scale, and the availability of EPCRS is uncertain. Such discoveries are better made – and resolutions discussed – with private advisors before the IRS is part of the conversation. If additional time to complete the questionnaire is necessary, employers should request it of the IRS before reaching the 25-day deadline.