IRS issues new 403(b) plan audit guidelines

[Guest CVCalhoun]

The IRS recently issued new audit guidelines for 403(B) plans. Although the guidelines have apparently not been picked up by any of the major legal research services, we have been able to obtain a copy, which you can view by clicking here. (Please be patient, though; the guidelines are quite long and take a while to load.)

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Employee benefits legal resource site

[Guest PeterGulia]

Thanks for publishing this for us.

It's helpful that the revised guidelines makes clear that a 403(B) program need not have any plan document (other than the annuity contract or custodial account agreement).

Some eb lawyers have advised that an employer that seeks to make available a voluntary salary-reduction-only program should avoid any program document so as to avoid any inference that it "established" a plan. Do you agree?

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[Guest CVCalhoun]

The usual concern here is to avoid having the 403(B) arrangement characterized as a "plan" under the Department of Labor regulations. However, I do not believe that the mere adoption of a written statement as to who can contribute and how would cause the arrangement to be a plan. And I have seen a lot of situations in which the absence of a document caused problems, e.g., because employees were erroneously excluded from the ability to make voluntary salary reduction contributions in violation of section 403(B)(12). Thus, I prefer to see at least some basic written statement about the terms of the arrangement, even though of course it is important not to refer to it as a plan document.

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Employee benefits legal resource site

[Guest PeterGulia]

Thanks for your thoughts.

When I have drafted this (as a first draft for editing by the employer's counsel), I styled it as a payroll practice, and focused the document (usually, one or two pages) on the simple yes/no question of when a paymaster should accept or reject a salary reduction agreement. For example, (1) every common-law employee of any kind is eligible, (2) each participant must the form of salary reduction agreement specified by the employer, and (3) the employer may reject a proposed agreement or terminate an existing agreement if the employer has not received satisfactory assurance that all contributions to be made under the agreement would be within all applicable limits.

I've believed that #3 does not "establish" anything because it is a modest administrative power necessary to the employer's statutory duty to correctly report and withhold upon wages.

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[Everett Moreland]

I believe that limiting contributions to the excludible amount does establish a plan under ERISA, because it involves the employer in a very complex administrative task, especially where employees have available the alternative elections (as anyone who has wrestled with this knows). In plan documents I do not restrict the amount of contribution but do use the following to require employees to furnish the employer with information required to make proper withholding. I would appreciate thoughts on this question.

"Each Employee who proposes to enter into or has in effect a Salary Reduction Agreement shall, when required by the Employer, determine and inform the Employer of the amounts of (1) the Employee's limit on elective deferrals under IRC Sections 401(a)(30), 402(g), and 414(u), (2) the Employee's exclusion allowance under IRC Sections 403(B) and 414(u), (3) the Employee's limit on annual additions under IRC Sections 415 and 414(u), and (4) any contributions under a plan, contract, or arrangement of an employer other than the Employer that are to be aggregated with contributions under this Program in determining the Employee's limit on elective deferrals under IRC Sections 401(a)(30), 402(g), and 414(u) or the Employee's limit on annual additions under IRC Sections 415 and 414(u). The Employer shall receive this information for the sole purpose of determining the Employer's obligations regarding income tax withholding and payroll taxes. The Employer may refuse to enter into a Salary Reduction Agreement with an Employee who fails to demonstrate to the Employer's reasonable satisfaction what portion of the contributions to be made by the Employer under this Program is excludable from the Employee's gross income. The Employer may require this demonstration on a worksheet provided by the Employer or in such other reasonable format as the Employer determines."

[Guest CVCalhoun]

For those who want a quick summary of interesting stuff in the guidelines, one is available by clicking here.

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Employee benefits legal resource site