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IRS Rolls Out Compliance Project Focused on 457(b) Deferred Compensation Plans

July 24, 2013

The IRS recently announced it would begin conducting "compliance checks" of Section 457(b) plans of nongovernmental, tax-exempt employers, including colleges and universities. While these checks are not full audits, institutions sponsoring 457(b) plans can expect the IRS to request extensive information related to plan documentation and operational compliance.

Background. The Internal Revenue Code (IRC) allows governmental and tax-exempt entities to sponsor these types of deferred compensation plans. Under Section 457(b) of the IRC, participation in such plans—often referred to as "top hat" plans—must be limited to a select group of highly compensated individuals and management employees.

Program Focus. In June, the Employee Plans Compliance Unit (EPCU) of the IRS announced it would conduct compliance checks of 200 457(b) plans by September 30, 2013, with another 200 plans to be checked between October 1, 2013, and September 30, 2014. Organizations that filed Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan, as well as a Form 990, may receive letters with questionnaires requesting more detailed information regarding their 457(b) plan's compliance.

The program aims to:

  • Verify that deferrals reported on Forms W-2 represent a 457(b) plan.
  • Determine whether the sponsor is eligible to maintain a 457(b) plan and, if so, whether the sponsor is a governmental unit, a tax-exempt entity, or a "dual status" entity (both governmental and tax exempt).
  • Verify that plan participation is limited to a select group of highly compensated individuals and management employees.
  • Determine whether the plan contains features not permitted in such a plan, including participant loans, age 50 catch-up contributions, or contributions placed in a trust for the exclusive benefit of participants.
  • Determine whether unforeseeable emergency distributions have been made.

If the IRS concludes that the 457(b) plan hasn't been established or operated in accordance with 457(b), it will inform the plan sponsor of needed actions, which may include a full audit of the plan or correction under the IRS's Voluntary Correction Program (VCP).

Next Steps. While responding to any "compliance check" is technically voluntary, not responding to the inquiry can be expected to draw further IRS attention to your plan and could result in an audit.

If your institution receives a compliance check letter, respond to it in a timely and accurate manner. First, however, consult internal or outside counsel, as any information you provide the IRS could be used to initiate a plan audit.

Initiation of this 457(b) program signals heightened IRS interest in and scrutiny of 457(b) plans. Therefore, all institutions that sponsor these plans should proactively address any documentary or operational issues-even if they do not receive a "compliance check" letter and questionnaire.

Contact

Mary Bachinger
Director, Tax Policy
202.861.2581
E-mail