1. IRS Exams of 403(b) & 457 Plans

2. Contact Information
Robert J. Architect
TEGE
Washington, DC
(Feel free to change this slide to include your own information as a presenter.)

3. Current Exam Issues – 403(b)
Ineligible Employer
Excess Elective Deferral contributions
Review of payroll records & HR records & W-2
Universal availability
Review of payroll records and HR records
Plan Loans violate IRC 72(p)
Review of account records & 1099-R
Impermissible distributions-bad hardships
Review of account records & HR records & 1099-R
Contract provisions
Review of contract

4. 5 Year Post-Severance Contributions
No CODA must be employer contributions
Audit steps
Will review plan
Will review employment contracts
Will review all documents for any cash options
Will review for guaranteed payouts upon death

5. Sick & Vacation Pay Issues
Sick & Vacation Payments
Avoiding constructive receipt
Payroll records; Benefits Handbook; Union Contracts
Elective Deferrals to 403(b), 457(b), or 401(k) – Timing 415 regulations

6. Sick & Vacation Pay Issues (cont)
Contributions to 401(a) plan
If have cash option – Impermissible CODA -Governmental
Contributions to 403(b)
If subject to a cash option
treated as elective deferral and not eligible for special 5 year post-retirement contributions
Converting to employer contributions
Attempts to avoid FICA
Seek expert advice – many pitfalls

7. How 403(b) Regulations may impact exams –Based on Current content of proposed regulations- Caution (a work in progress)

8. Plan In Form & Operation
Must be maintained pursuant to a written DC plan
Both form and operation
Future timely amendments
Audit Steps
Will review plan provisions for form and compare to plan operation

9. Universal Availability – 20 hour requirement
ER must reasonably expect employee to work < 1000 hours for ensuing 12-month period
Subsequent plan year or 12-month period the employee actually worked < 1000 hours in the preceding 12-month period
Audit steps – Must track hours

10. Universal Availability (cont)
Permissive exclusions - not allowed
Collective bargaining employees
Visiting professors
Employees who have taken a vow of poverty
Employee with a one-time election to participate in a governmental non-403(b) plan

11. Form Requirements -Contract
401(g) – Transferability of annuities
401(a)(30) – Elective deferral limit
401(a)(31) – Direct rollover
401(a)(9) – Required minimum distribution
Incidental benefit requirement
Audit Issue
Current audit issue – first 3 above
Now plan form requirement

12. Timely Payment of Elective Deferrals
Contribution amounts must be transferred to providers within a period no longer than is reasonable for proper plan administration. – 15 day example
Audit – Review operation

13. New Elective Deferral Requirement
401(k) Hardship suspension
Effective opportunity to make cash or deferred election
Anti-conditioning
Audit Steps
Will compare form and operation

14. Life Insurance No separate life insurance contracts
Incidental death and disability permitted
Audit steps
Will review contract provisions

15. Non-Taxable Contract Exchange
In the past – Rev. Proc
Potential changes
Transfer language must be in plan
Transfer must be related to the plan
Audit Steps
Will review the form & the operation

16. Excess Contributions – IRC 415
Old rules – did not impact contract going forward
Potential rules
Must have separate account
No separate account
Contract does not qualify for exclusion in current and future years.

17. 457(b) Eligible Plan:
Exam Issues

18. 457(b) Exam Issues
Misunderstanding employer contribution limits & payroll taxes:
Dollar limit for 2006 is $15,000 for both employer and employee contributions
IRC 415(c) limit does not apply
(FICA applies to both types of contributions.)

19. 457(b) Exam Issues Final 3-year catch-up causing excesses:
Counting under-utilized limit for years before the plan existed.
Using the year of retirement rather than the 3 years before year of normal retirement age in the plan.

20. 457(b) Exam Issues Final 3-year catch-up causing excesses:
Errors in counting prior contributions to determine underutilized limit.
Especially years before 1/1/02 when limits were coordinated.

21. 457(b) Exam Issues Multiple plan document issues:
More than one normal retirement age.
Attempt to use multiple 457(b) limits.
Contribution limits apply to the individual.

22. 457(b) Exam Issues Abuse of unforeseeable emergency withdrawal rules:
Attempting to apply the less restrictive 403(b)/401(k) hardship withdrawal rules.
Not monitoring requests.

23. 457(b) Exam Issues Failure to monitor loan limits:
Often due to multiple 457(b) plans or 457(b) providers, or
Loans in multiple plans.
E.g., 403(b) and 457(b).
Loan limits apply to all plans of the current employer.

24. Violations in Non-Governmental Plans
Permitting loans
Permitting rollovers
Permitting the age 50+ catch-up

25. Exam Issues – 457(f)
No substantial risk of forfeiture or risk has expired
Review Employment contacts
Review of benefits handbook
Inadvertent 457(f) arrangements
Review of union contracts
Announcement
Severance pay arrangements

26. IRC 409A and Impact On 457 Plans

27. Deferred Compensation Under 409A
409A added by American Jobs Creation Act of 2004
Notice – Guidance on scope of coverage – Q&A- 6,10,15 particularly
Notice –Suspends 2005 Reporting previously set out in
Announcement
W-2 Box-12, Code Y – Report deferrals
Announcement
W-2 Box-12, Code Z – Report income

28. Application of IRC 409A to IRC 457 Plans
Eligible 457(b) Plans
IRC 409A does not apply – Notice Q&A -3
IRC 457(f) plans
IRC 409A applies when vested but 409A and 457(f) work independently
Satisfying 409A may not satisfy 457(f) – 2 ½ month rule
Grandfathered arrangements under 457
No exception for 409A

29. Proposed 409A Regulations Issued – 09/29/2005

30. Substantial Risk of Forfeiture
Same definition as 457(f)?
Not necessarily a substantial risk of forfeiture
Salary reduction deferrals
Rolling Risk – Unilateral extensions
Covenants not to compete

31. Severance Pay If valid not 457(f)/409A But Limits;
Circumstances - Windows
Dollar amounts
Timing

32. Publications Available
4406 – Comparison Chart 403(b)/457
4482 – 403(b) for Participant
4483 – 403(b) for Sponsor
4484 – Chart of Retirement Plans for Tax Exempt & Governmental Entities

33. Visit - www.irs.gov/retirement