OUR THOUGHTS ON:

IRS Rolls Out Compliance Check for 457(b) Plans

Not-for-Profit

By Debra Ries

The Employee Plans Compliance Unit of the Internal Revenue Service kicked off a new compliance check project directed at non-governmental Section 457(b) plans. A Section 457(b) plan permits a tax-exempt entity to sponsor a non-qualified deferred compensation plan for a select group of highly compensated employees, managers, directors or officers. Often, these plans are referred to as “top hat” plans.

In its announcement, the IRS identified the following as the goals of this compliance check project:

  • 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.

The IRS reported that it will send the compliance check letters and questionnaires to approximately 200 organizations in its fiscal year ended September 30, 2013, and another 200 in its fiscal year ended September 30, 2014. All organizations that receive a questionnaire are advised to respond in order to avoid future inquiries.

The “10 question” compliance check is designed to focus on the following:

  • Verify that deferrals reported on the participants’ Forms W-2 represent a Section 457(b) Plan;
  • Determine whether the plan sponsor is eligible to have a Section 457(b) Plan, and if eligible, whether the sponsor is (1) a governmental unit, (2) an organization exempt from federal income tax under Section 501(c) of the Code, or (3) a “dual status” entity (that is, one that is both governmental and exempt under Section 501(c));
  • Verify that participation in the plan is limited to a select group of highly compensated employees, managers, directors or officers;
  • Determine whether the plan contains features not permitted, such as loans, age 50 catch-up provisions, or contributions placed in a trust for the exclusive benefit of participants; and
  • Determine whether unforeseeable emergency distributions have been made.

If, as a result of the compliance check, the IRS concludes that the plan is not established or operated in accordance with requirements of Section 457(b), the IRS will inform the sponsor as to what actions are required, which may include the IRS auditing the plan or the plan sponsor making corrections under the IRS Voluntary Correction Program.

If your organization has a Section 457(b) Plan and has received a compliance check questionnaire from the IRS, please contact Susan M. Kirsch or Debra A. Ries for assistance. 

© 2013 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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