The Internal Revenue Service (the “IRS”) recently announced a new compliance check project for 457(b) plans that are sponsored by non-governmental, tax-exempt employers (for purposes of this alert, the “Compliance Project”). Through this new Compliance Project, the IRS intends in part to verify that non-governmental 457(b) plans comply with applicable tax laws, and gather information about issues of noncompliance and barriers to compliance under those laws.
Employers Selected for the Compliance Project. The Employee Plans Compliance Unit (“EPCU”) at the IRS will send compliance check letters and questionnaires to approximately 200 employers by September 30, 2013, and to another 200 employers from October 1, 2013 to September 30, 2014. All employers contacted by EPCU will have filed Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan and also filed IRS Form 990. The IRS has informally indicated that it will randomly select the employers that receive the compliance check letters and questionnaires based on the information reported on the employer’s IRS Form 990.
Respond to IRS or Risk Possible IRS Audit. If an employer receives a compliance check letter and questionnaire, we strongly recommend that it provide a timely response to the IRS. An employer should respond to the IRS even if it does not maintain a non-governmental 457(b) plan or if it believes it was contacted in error. Based on the past practices of the IRS in connection with similar compliance checks, it is highly likely that the IRS will initiate an audit of the plan if an employer does not respond to the IRS.
Q&B Key: With the increased attention from the IRS, an employer should take this opportunity to review its 457(b) plan document — and the operation of the plan — to proactively address any potential issues, even if the employer does not receive a compliance check letter or questionnaire under the Compliance Project.
What an Employer Can Expect Under the Compliance Project. EPCU will correspond with an employer to collect information about the employer’s non-governmental 457(b) plan. The IRS has stated that it will focus on various issues, including whether: (1) the deferrals reported on the Forms W-2 are in fact being made to a 457(b) plan; (2) the employer is eligible to have a 457(b) plan and what type of tax-exempt employer it is (e.g., governmental, non-governmental or a dual status entity); (3) the eligibility under the 457(b) plan is limited to a select group of management or highly compensated employees; (4) the 457(b) plan includes features that are not permitted under federal law (e.g., loans); and (5) unforeseeable emergency distributions have been made.
If the IRS determines through the Compliance Project that an employer’s non-governmental 457(b) plan is not established or operated in accordance with federal law, it has stated that it may initiate an audit of the plan or recommend correction under the IRS’s Voluntary Correction Program. However, the IRS has not stated how an employer would use the IRS Voluntary Correction Program, as that program does not currently include correction procedures for non-governmental 457(b) plans.
Q&B Key: An employer’s responses to the IRS under the Compliance Project should be reviewed by an attorney familiar with non-governmental 457(b) plans, since any information an employer provides to the IRS could be used to initiate an audit of the plan.
Links to Guidance: The IRS announcement regarding this Compliance Project can be found here.