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Attention 403(b) Retirement Plan Sponsors – The IRS May be Knocking

The IRS has a new project focused on higher education 403(b) retirement plans.  The IRS wants to know whether higher education 403(b) plans are  complying with the universal availability requirements and the written plan document requirements of 403(b). How will the IRS determine whether plans are compliant?  They are going to ask with a mandatory questionnaire.

03(b) plans sponsored by colleges and universities must demonstrate that salary deferrals, including after-tax Roth deferrals, do not discriminate in favor of highly compensated employees. If any employee is allowed to participate in the deferral plan then all employees (with limited optional exclusions) must be allowed to participate.  Failure to comply with the universal availability requirement is a reoccurring issue and according to the IRS one that is consistently in the top ten operational deficiencies seen by the IRS. The IRS is also checking to see whether sponsors have formalized their 403(b) plan terms in writing as required by IRS’ final regulations. The IRS will conduct a random national sample of over 300 large, medium and small public and private institutes of higher education by asking them to complete a questionnaire.  Responses will be evaluated and a determination made as to whether the plan is in compliance.  If the IRS determines the plan is compliant it will issue a closing letter. 

However, if the responding information is unclear or there appears to be a problem, the IRS will follow-up with the plan sponsor.  If a responding plan recognizes their plan is non-compliant they should utilize an available correction method. If you receive a questionnaire, whatever you do, don’t ignore the request to complete it. On the IRS website it specifically states that failure to provide the information requested could result in further action or examination.  It is unknown which higher education sponsors of 403(b) plans will receive the questionnaire.  Therefore, it is important to be proactive and review your plan for compliance. 

If your plan is not compliant, you should use one of the available correction methods, otherwise the IRS may come knocking.



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