Tax-exempt entities that sponsor Internal Revenue Code Section 457(b) plans may soon find compliance questionnaires from the Internal Revenue Service (IRS) in their mailboxes. The compliance check will be conducted by the IRS Employee Plans Compliance Unit (EPCU). Questionnaires will be sent to approximately 200 non-governmental tax-exempt employers in fiscal year 2013, with an additional 200 employers receiving forms in 2014. According to IRS sources, recipients of the information requests will be randomly selected based on information reported on employers’ IRS Forms 990. The goals of the program are to identify noncompliance issues and to develop recommendations for employers on how to ensure plan compliance.
Eligible 457(b) plans, commonly known as “top hat” plans, are designed to provide nonqualified deferred compensation for select groups of highly compensated employees, managers, directors and officers of tax-exempt organizations. To achieve the intended tax deferral for participants, 457(b) plans must satisfy specific documentary and operational requirements. Among the requirements singled out for special attention by the EPCU are the eligibility of a plan’s sponsor, whether participant eligibility is properly limited to the select top hat group, whether the plan contains impermissible features, and whether hardship distributions have been made under a plan’s “unforeseeable emergency” provisions. If the IRS determines that a plan is not in compliance with the rules, the IRS may conduct a plan audit or recommend correction under its Voluntary Correction Program. The IRS announcement of the compliance review states that submissions relating to correction of these plans will be accepted on a provisional basis outside of the Employee Plans Compliance Resolution System (EPCRS) and will be evaluated on a facts and circumstances basis, employing standards that are similar to EPCRS.
Employers who receive the compliance check letters should respond to the letters promptly, even if they do not maintain a 457(b) plan or otherwise believe they were contacted by mistake. Also, given the IRS scrutiny, all tax-exempt employers with 457(b) plans may wish to review the documentation and operation of their plans, regardless of whether or not they receive a questionnaire. Details of the program may be found on the “Employee Plans News” page of the IRS website, http://www.irs.gov/Retirement-Plans/Employee-Plans-News.