A Good 403(b) or a Bad 403(b)? A Question IRS Auditors Look to Answer
In each case, the answer depends on whether the document and operation are in compliance with the many technical requirements for section 403(b) plans. IRS officials have recently indicated that the IRS expects to launch audit initiatives this summer targeting section 403(b) plan compliance, so now is a good time for employers with section 403(b) plans to take a close look at their documents and administrative practices.
Tax-exempt organizations and public schools often sponsor section 403(b) plans for retirement. Sometimes vendors will market the section 403(b) plans as “turn-key” products where the employer simply signs up with the vendor and the vendor takes it from there. It seems like an easy way to make a retirement savings plan available to employees with a minimum amount of employer involvement.
Yet the tax rules governing section 403(b) plans can be quite technical and are sometimes overlooked. For example, section 403(b) plans are subject to a “universal availability” requirement. See our blog on recent developments in this area. If a plan does not comply with that rule, there could be significant tax consequences for employees.
If plan sponsors self-identify errors, they can take advantage of the IRS Employee Plans Compliance Resolution System (EPCRS) to correct the mistakes—often without penalty. Many errors can be self-corrected without even having to request IRS approval. Even if IRS approval is required, the cost of voluntary correction is generally less than if the IRS discovers errors on audit.
The old saying goes “To err is human; to forgive divine.” But when it comes to plan administration, administrators tend to be more human than the IRS is divine. Therefore, it is well worth the effort to conduct a compliance review, identify errors, and correct them before the IRS comes calling.