The Internal Revenue Service recently announced it was conducting “compliance checks” of Section 457(b) plans.  This newsletter discusses what those compliance checks involve as well as the steps Section 457(b) plan sponsors should take given this announcement.

The Internal Revenue Service (IRS) recently announced that it would begin conducting “compliance checks” of Section 457(b) plans maintained by non-governmental entities (e.g., health systems, educational institutions, museums, etc.).  Though the compliance checks are not full audits, plan sponsors can expect the IRS to request extensive information regarding written and operational plan compliance.


The Internal Revenue Code (IRC) permits governmental and tax-exempt entities to sponsor tax-advantaged retirement plans meeting the requirements of Section 457(b) of the IRC.  457(b) plans maintained by tax-exempt entities must be “Top-Hat” plans, limiting participation to a select group of highly compensated individuals and management employees.  Numerous nonprofits sponsor 457(b) plans as a means of providing additional nonqualified deferral opportunities for their highly compensated executives.

Summary of IRS Announcement

On June 3, 2013, the IRS announced that it would be conducting compliance checks of 200 457(b) plans by September 30, 2013, and another 200 plans between October 1, 2013, and September 30, 2014.  Organizations that filed (1) Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan as well as (2) a Form 990 may receive letters requesting more detailed information regarding their 457(b) plan’s compliance.  The IRS has stated it will focus on the following:

  • Verifying that deferrals reported on Forms W-2 represent a 457(b) plan
  • Determining if the sponsor is eligible to maintain a 457(b) plan and, if eligible, whether the sponsor is
    • A governmental unit
    • A tax-exempt entity
    • A “dual status” entity that is both governmental and tax exempt
  • Verifying that plan participation is limited to a select group of highly compensated individuals and management employees
  • Determining whether the plan contains features not permitted in such a plan, including
    • Participant loans
    • Age 50 catch-up contributions
    • Contributions placed in a trust for the exclusive benefit of participants
  • Determining whether unforeseeable emergency distributions have been made

If the IRS then determines that the 457(b) plan isn’t established or operated in accordance with 457(b), it will inform the plan sponsor what actions are needed, which may include a full audit of the plan or correction under the IRS’s Voluntary Correction Program (VCP).  Because VCP explicitly states that 457(b) plans are not eligible for its correction procedures, the mechanics of making a VCP correction for a 457(b) plan are not yet clear. 

While responding to the compliance check is not required, the IRS noted that it “may need to take other measures to ensure compliance, including an audit of [the 457(b)] plan or organization.”  As a practical matter, such an audit is likely if a plan sponsor does not respond to the compliance check, as this was the course of action taken by the IRS during the 401(k) compliance check it conducted several years ago.

Next Steps

If your organization receives a compliance check letter from the IRS, respond to it timely and accurately after consulting an attorney, as any information you provide the IRS could be used to initiate an audit.  In addition, the introduction of “compliance checks” may indicate increased IRS scrutiny of 457(b) plans, so sponsors of these plans may want to take steps to proactively address any documentary or operational issues even if they do not receive a “compliance check” letter.