Prm 403b Plan Study

PRM CONSULTING GROUP, INC • 1814 13th STREET, NW, WASHINGTON, DC • 202.745.3700

What to Do Before the IRS Comes Knocking Getting Your 403(b) Retirement Plan in Shape

Prepared by:

Michael J. Rhim

Principal

The IRS is Coming

The IRS has made no secret that it will intensify its enforcement program for 403(b) plans in 2010

Some institutions have already been audited by the IRS and the results have not been pretty

The IRS has made it clear that it is concerned about compliance in the 403(b) world

04/09/23 403(b) Retirement Plan Study 2

Why Now?

Final 403(b) regulations provide auditors clear guidance tools

403(b) plans have operated in relative obscurity

Employers have not provided proper oversight of 403(b) plans. (Employer comments have ranged from “my vendor will make sure we are in compliance” to “we tested our plan for discrimination two years ago”)


Why Did the IRS Begin Auditing Plans?

1993, IRS focused nonprofit audits on expense accounts, housing allowances, other fringe benefits

Discovered number of 403(b) audit problems in the process

Expanded audits to 40 hospitals, colleges and universities

All audited plans failed at least one aspect of the testing


What are the Major Categories the IRS Will Focus On if Audited?

Plan design and documentation

Contributions

Distribution

ERISA Compliance

Fiduciary Responsibilities


What Do I need to Know?

Here are sample questions that you need to be able to answer

• Have you tested your plan against non-discrimination rules?

• Is your institution’s written document customized and up to date?

• Are you implementing the universal availability rule?

• Have you annually distributed summary annual reports to your employees?

• Are you utilizing Information Sharing Agreements?

• What have you done about any vendor complaints regarding plan services?

• And much more


Common Written Document Problems

Plan language does not fit actual operation

Plan amendments not up to date

Definition of compensation does not match what payroll is doing


Written Plan Requirement

The terms of the funding vehicles must be consistent with the terms of the plan

Conflicting provisions could result in contract failure

IRS has pre-approved plan documents and determination letters for guidance


Written Plan Requirement

What is your course of action?

• Create plan document

• Restate plan document

• Review plan provisions for consistency

• Modify existing document

• Talk to your attorney

• Talk to your vendor or consultant


Salary Reduction Agreements

Clients have not updated agreements to match current compliance

provisions

Need to be in place and clear to understand to participants


Non-Discrimination Testing

Coverage test, ACP test, non-discrimination test

Employers have assumed passage of test without

conducting testing and providing proof

Plans don’t know they fail until its too late

ACP test allows some leeway, but it’s important to test

within 2½ months of close of plan year

Need to annually have the plan tested


Sample Compliance Issues

Summary Annual Reports need to be distributed to all employees on an annual basis

Summary Plan Descriptions should match plan document rules

Form 5500 filings require accountants opinion for plans with more than 100 lives at the beginning of the plan year


Staying Ahead of Compliance Troubles

Make sure safeguards are in place and limit salary based on 401(a)(17)

Periodically spot check highly paid and long service employees and don’t rely solely on vendor

Incoming participants need to understand coordination of annual limits

Service has noted the failure to satisfy plan loan provisions as a top issue for review

Excess loan defaults are a red flag


Staying Ahead of Compliance Troubles (continued)

It is your responsibility as plan sponsor to notify all participants of their obligation to report outside contributions

• Create employee notification template• Have vendor provide individual

or group calculations• Perform your own audit check


Failures Identified by the IRS of Audited Firms

Service has noted the improper exclusion of employees from inclusion in the retirement plan

Some Plan Documents are not clear in defining eligibility which is a red flag in an audit

Confusion surrounding the 1,000 rule which leads to potential exclusion of in-excludable employees


Summary of Steps to Take Before the IRS Comes Knocking

• Review written document for restatement or enhancement

• Make sure document terms are consistent with actual application of plan operations

• Make a determination on your approach to non-discrimination testing

• Review communication to employees (SRA, SPD, Enrollment, etc)


Summary of Steps to Take Before the IRS Comes Knocking (Continued)

• Spot check payroll data against compliance limits• Make sure vendor is operating plan in accordance with plan

rules• Take an enhanced fiduciary look at the overall plan• Document your process for the file


Information Sharing Agreements (For Multi-Vendor Plans)

Information Sharing Agreements were introduced in 2007 and cover the movement of information between plan sponsors available under your plan

Information includes employment status, hardship withdrawals, loans, severance from employment


IRS Focus

We also zero in on the issues we think are important or possible areas that could be non-compliant in that market segment. Upon the agent’s visit for the examination, if he or she finds good credibility, finds no surprises from the initial interview, and finds the internal controls to be good, then we most likely will not have a need to expand our audit beyond the items initially selected to examine.”

Page 3, Internal Review Guide Book

Your Goal, get the IRS to “CASE CLOSED”.


What Happens if Our Plan Fails IRS Review?

• Failure to comply with the new regulations could lead to plan disqualification or taxation of plan assets

• Adopt a goal to administer your plan in a way that will allow the IRS auditor to conclude an audit as quickly as possible

• Good internal controls and processes, good documentation, accessibility of information, are all positively viewed by the IRS


How We Can Help

PRM has experience in working with clients to ease the stress

associated with meeting all 403(b) provisions. We can assist by:


Contact US

Give us a call at 202-745-3721 or contact

us at [email protected]

before the IRS calls you.


mailto:[email protected]

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