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Correcting for Universal Availability

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In a question I posted yesterday in this forum on 403b plans, I noted that I'm advising an ER that has received a 240-day correction letter from EPCU (employee plans compliance unit) of the regional IRS Center. The EPCU correction letter notes that some excluded EEs perhaps should have been included, and for this a lost-opportunity contribution is required during the 240 day period.

The EPCU letter is silent on how far back in time this lost-opportunity contribution ought to be made. It simply states that "a contribution to the plan on behalf of each eligible employee for each year the employees was improperly excluded from participation" may need to be made. The EPCU letter also notes: "A violation of the universal availability requirement puts a section 403(b) plan at risk for losing its tax-favored status, resulting in the loss of the retirement savings and tax benefits provided to its participants."

If the ER did not have a valid 403b program because of the universal availability violation, then those EEs that did make 403b elective deferrals, it could be argued by the Service, had taxable income in the amount of the 403b elective deferrals.

For those EEs that did have the opportunity and did make 403b elective deferrals, the statute of limitations on their Forms 1040 would be 3 years from later of date filed or due date of return (as perhaps extended), unless more than 25% of taxable income was not reported--then it is 6 years. Since it is possible that some of the EEs 403b deferred amounts that equaled or exceeded 1/3 of what they did report as taxable income for a year, I think the correction should go back at least 6 years, picking up 2003-2008.

The ER does not pay income taxes, so deductions are not an issue. It is a public school and does not file any return other than payroll ones. For Forms 941/945, the instructions to the correcting form, Form 941c, provides:

Statute of limitations. Generally, you may make an adjustment only within three years of the return due date or the date the return was filed, whichever is later. For the statute of limitations, the due date of Forms 941, 941-M, 941-SS, 943, 944, 944(SP), 944-SS, and 945 is April 15 of the year after the close of the tax year. For example, the four quarterly Forms 941 filed for 2004 are all treated as due on April 15, 2005. If they were filed on or before April 15, 2005, adjustments could be made for any of the quarterly returns for 2004 until April 15, 2008.

No Forms 5500 have been filed (nor required). So statute of limitations on a year of the plan likely has no statute of limitations period triggered to run.

What are the arguments for going back to years earlier than 2003?

John Simmons


Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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