IRS Audit of Public University 403(b) Plan

[Guest gaham]

I am representing a public university in connection with their 403(b) plan. One of the issues the IRS is looking into is the aggregation of limits of the university's 403(b) plan with outside plans controlled by employees of the university. The IRS wants the university to inquire of certain employees information on their outside businesses even to the point of how much contributions have been made to the plans of these unrelated businesses. I strongly believe that our delving into matters on behalf of the IRS outside the scope of these employees' university employment is inappropriate. Has anyone had any experience with this issue and, if so, how did you handle?

[PensionPro]

How would the university be in a position to apply the 415(c ) limit without this information?

[Guest gaham]

The individual, not the employer, is considered to maintain the annuity contract for this purpose according to the regulations. Your question points out the awkwardness of enforcement of the regulations. Why should the university be obliged to investigate and potentially suffer adverse consequences over contributions it has no control over? My view is if the IRS wants this information they need to get it from the individual or his business.

[PensionPro]

My understanding is that it is the employer's responsibility to ensure contributions do not exceed the applicable limit. In order to meet this obligation the employer needs information about other plans sponsored by an entity in which the individual/employee has controlling ownership.

While it seems awkward, an employee's hiring packet could include a form that says something along the lines of "I certify that no contributions are being made to a retirement plan sponsored by an organization in which I have ownership interest and will inform the Plan Administrator if this changes." Then you only have to delve into employees who marked No.

I think the IRS is focussed on the employer's responsibility in this regard and what procedures are in place to properly apply the limits. Maybe others can chime in on how they handle this.

[PensionPro]

I was looking at TIAA-CREF's website and this is what it says:

Plan sponsors are required to gather the necessary information to determine if the 415© limitations are satisfied. We have developed a range of information-gathering tools to aid you in doing this.

http://www1.tiaa-cref.org/plansponsors/resources/compliance/403b/details/contribution-limits/excess_415_amounts.html

[QDROphile]

The IRS has the power to audit the individuals of interest. What would be more obtrusive? And how would the university liek to explain why someone got audited? Any chance the university employees are physicians? The IRS does not like docs and the employer should have stepped up the game with docs. While I appreciate client loyalty and advocacy, you have to recognize the the enforcement landscape changed under the regulations. The employer should have taken serious steps to make sure that participants knew of the odd annual additions rule so the participants could take appropriate measures to comply. The participants would also have less to be upset about when the inquiry comes. If the employer acts diligently in the matter, the IRS is not going to beat up the employer. I don't think the IRS expects the nonprofit employer to supervise the employee's other plans. The attitude that the employer should not have to be bothered with any responsibility for addressing the issue is not going to get you any points and you should be concerned that the IRS might be in the mood to make an example out of a high profile institution. The IRS is fed up with noncompliance in the 403(b) arena. That is why we got the new regulations with focus on the employer. Cooperation is usually the best policy in an audit.

[Carol V. Calhoun]

What we have had our clients do is to provide in our plan document that if the maximum limits would otherwise be violated, benefits under the outside plan are to be cut back before benefits under the 403(b) plan. Then in the salary reduction agreement, we have had the employee certify that if there is an outside plan, the employee will ensure that benefits are appropriately limited so as not to cause a violation when the plans are aggregated. So far, at least, we have never had the IRS demand anything else if those precautions were followed.

[Guest gaham]

QDROphile -- You make a good point about the practicalities of the situation. We can ask the employees about their outside plans and they certainly don't have to give us that information, but we can forewarn them that if they don't cooperate they and their businesses will likely be audited. That might be the better approach. That said, the rules are still goofy -- no aggregation with an employer's other defined contribution plan but aggregation required for a plan totally outside the control of the employer.

[Guest gaham]

Carol -- the question is how do you know those precautions are being followed? Are you saying that if you take those precautions, the IRS will not seek verification in an audit? I suppose if you forewarn employees and an excess occurs you could take some action against the employee but if the excess still occurs the excess is deemed to be in the 403(b) contract, subjecting the employer to potential failure to withhold/report problems. Isn't that correct?