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The Fiduciary Focus Blog

IRS 403(b) Plan Audits: Top Areas of Focus

A.J. Walker, AIF ® 02 February, 2017


Organizations that sponsor a 403(b) plan intend to manage the plan in a compliant manner, but due to the level of complexity of today's retirement plan it can be an overwhelming feat to do so. In recent years the IRS has stepped up its audits of 403(b) plans.  Here's some top areas of focus for the IRS and common ways that a plan may fall out of compliance: 

1. Plan sponsor has not followed the terms of their written plan document.

Included in the plan document are a multitude of operational items that the plan sponsor and any hired service providers must follow.  Many times this can include the definition of compensation is being improperly calculated, thus throwing off employer match contributions and testing of the plan deferrals (ACP & ADP tests).  Its very common to find that the plan document states an operational procedure that isn't designed how the sponsor intends or is not being followed correctly.  A deep review of the plan document  relative to operational procedures should be conducted upon any document changes to ensure compliance.  If  the plan sponsor finds that it has not followed the terms of their written plan, the sponsor should communicate all operational  or plan changes to appropriate service providers to prevent issues.  Also, to correct the issue, the employer can retroactively adopt plan amendments that conformt he plan to operations or correct operations to match plan terms.  

A similar item that our consultants sometimes see may be  that the sponsoring organization is  no longer be eligible to sponsor a 403(b) plan.  If  the sponsoring organization loses its  IRS approved status (educational institution, 501(c)(3) charitable organization, nonprofit healthcare or  religious  organization), the  organization will immediately need to stop all plan contributions and undergo a Voluntary Correction Program filing.

2. Eligible employees excluded from making a salary deferral.

This can be a common issue in a  403b audit, especially when internal staff has operated previously in a 401(k) plan environment and are unfamiliar with  the universal availability requirement.  This means  that if you permit one employee to defer salary into your 403(b) plan, you must offer it to all employees.  When taking corrective action on this item, it's important to consult your 403 b plan document to understand which employees that you may exclude from the plan. If it's necessary, a corrective contribution from the organization  to the plan  may have to be made to compensate employees for their missed deferral opportunity. In order to avoid this type of error in the future, it's important to provide proper eligibility notification to  employees  at least annually.

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3. The Plan Sponsor does not have a written plan document for the 403(b) Plan or   didn’t adopt a written plan intended to satisfy the law by December 31, 2009.

403(b) plan sponsors were required to have adopted a written plan by December 31, 2009.  This sounds like  an obscure failure for plan  sponsors, but it has been known to happen.   From the IRS 403(b) Fix-It Guide,

 The written plan doesn’t need to be in a single plan document, but may bundle several documents that detail all the provisions of how the plan works. The 403(b) plan sponsor should ensure that there is no conflict among the documents. There must be a single plan document coordinating administration among the plan’s 403(b) vendors. The plan should then operate according to the terms, conditions and provisions contained in the written plan or program, in addition to the rules and regulations of the Internal Revenue Code. For example, if a 403(b) plan sponsor decides to offer participant loans and distributions because of financial hardship, then the written plan or program must explain the participant’s ability to take loans or hardship distributions, and how the plan will manage the loan program and determine financial hardships.

You can find the mistake by checking your records to ensure your written plan was intended to comply with final 403(b) regulations and was adopted by 12/31/2009.  While the plan sponsor is responsible for keeping the document in compliance,  consulting with your vendor and ERISA auditor may assist in whether your documents are out of date than their records.  The solution would include drafting a written plan that complies with final 403(b) regulations and submit the plan under the IRS Voluntary Correction Program.

More Resources

The IRS has put together their list of top ten issues for 403(b) and 457 plan audits  here.

Also, TIAA-CREF  has put together a robust list of ten  areas of focus for 403(b) Plan Audits found here.

If you have more questions about your fiduciary responsibility, please  download our free Fiduciary Responsibility Guide eBook from the link below.

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Topics: ERISA Compliance, Fiduciary Governance Process, Higher Education, Healthcare