What to Know About a Governmental 457(b) That’s Under Audit

If you are notified by the IRS that your 457(b) plan is under audit by letter or phone call followed by an official letter — an Information Document Request, or IDR — notifying you that the IRS is auditing your plan, there are seven main areas you can address to prepare:

1. Plan Documents. Having compliant plan documents and following them is huge! Remember, unlike 403(b) plans, there are no IRS pre-approved plan documents, so gather all plan documents from the inception of the plan and all interim amendments. Again, unlike the 403(b), for which amendments were not required for interim law changes until the restatement, this is not the case with 457 plans. With governmental 457(b) plans, the employer has 180 days to fix that after the IRS becomes aware of it — so fix that now!

2. Excess Deferrals. For the IRS, this is low-hanging fruit! Fewer errors are easier to find than excesses deferrals. If you’ve had someone contributing over the limit in the past, work with your TPA and legal department to clear this up soon!

3. Ineligible Plans. If you are not a state or local government, you should not be operating a 457(b) governmental plan. If you are a state or local government agency and are not grandfathered in by rules back before May 1986, you should not have a 401(k) plan in place. 

4. Required Minimum Distributions (RMDs). This may not have a direct effect on your plan, but it could have severe consequences for participants if they are not taken.

5. Ineligible Participants. If the plan document was written to include or exclude certain employees, you need to stick to this. 

6. Plan Features. Plan features for vesting, loans and unforeseeable emergencies need to be followed. These options may or may not be allowed, but the plan needs to follow whatever is written in the plan document. If your plan has a vesting provision (this is uncommon), remember that the contributions do not count toward the annual limit until vested, which can cause excesses inadvertently.

7. Contributions. Making sure no one contributes over the contribution limit is another easy find for IRS auditors. These limits include contributions to other 457(b) plans, but are separate from those made to 403(b), 401(k), 401(a) or 457(f) plans. If contributions are made as pre-tax or Roth, then payroll should reflect the actual contributions in the account with the investment provider. Correct use of the age-50 and special three-year catch-up is another easy target for the IRS.