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Ineligible 403(b)


Guest Jim Brennan
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Guest Jim Brennan

Does anyone know how the IRS is treating 403(b)plans set up by employers who mistakenly thought they were 501©(3)?

Case in point is a hospital.

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Guest CVCalhoun

Badly, I'm afraid. Last I checked, IRS was taking the position that the participant was fully taxable on all contributions to the plan and, in the case of a 403(B)(7) (mutual fund) plan, that the participant was also taxable on the earnings of the fund. The good news is that IRS was not going after participants in such cases. The bad news is that IRS was going after employers. IRS was treating the employer as liable for all of the taxes which should have been withheld on the amounts included in participants' income as a result of contributions. And although employers would not normally be subject to any tax obligations as a result of earnings in a 403(B)(7), IRS was telling employers that if they did not pay those taxes anyway, IRS would go after the employees, and tell the employees it was doing so as a result of the employer's mistake (not a great thing for employee relations).

Moreover, under the original TVC program, this sort of error was not eligible for correction. I haven't checked lately, but I suspect that it may be covered by at least one of the myriad of voluntary correction programs available now--though probably the cost is higher than the minimum, given the seriousness with which IRS takes this sort of error.

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Guest CVCalhoun

I'm also curious about that question, but assuming that the hospital must have neglected to file the exemption request form in a timely manner.

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Guest CVCalhoun

Actually, a separately incorporated governmental hospital can get 501©(3) status. However, IRS takes the position (rightly or wrongly) that if it does, it loses its exemption from UBIT.

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It is possible that the hospital is a quasi-governmental entity, like a county hospital. They would not be eligible for a 501©(3) designation.

Also, the IRS has said the the "soon to be released" revised TVC program will include some relief for ineligible employers who have 403(B) plans. I have heard rumors that the relief will be very generous, but am reluctant to "publish" those rumors. If the IRS is as generous as the rumors purport, the employers will be able to coorect their 403(B) problems at minimal cost and effort.

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  • 3 weeks later...

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