Skip to main content

You are here

IRS Compliance Unit Checking Tax-Exempt 457(b) Plans

Ellie Lowder

The Employee Plans Compliance Unit (EPCU) is sending letters to tax-exempt sponsors of 457(b) top hat plans when employee W-2s show that the basic 457(b) plan limit of $17,500 in 2011 has been exceeded. Included in the letter is a series of check offs intended to confirm the basis under which the amounts over the basic limit are permitted.

This article will include each of the choices, with explanation of the rules for the final three-year catch up election, since our experience is that the complexity of the rules and the calculations necessary to determine whether any catch up is available has led to widespread confusion among our members.

The letter advises employers to check the statements that apply:

__ Your 457(b) plan allows for the special catch-up described in IRC 457(b)(3) during the last three years before normal retirement age. Author’s note: The EPCU letter points out that the three year period must be continuous and must not include the year of retirement. We also know that this catch up is available ONLY if there is a normal retirement age in the plan and only if there is underutilized limit (for each and every year the participant was eligible to participate in the plan).

__ The contribution amounts reported on the Forms W-2 included these special catch up contributions.

__ All special catch-up contributions made during the plan year was during one of the employee’s last three years of employment before reaching normal retirement age. Reminder that the letter indicates the catch up cannot be used in the year of retirement.

__ All special catch up contributions were limited to deferrals the participant could have made in prior years, but did not. The calculation must include a year by year comparison of the maximum limit in the year to the amount actually contributed in that year, with any amounts under the maximum limit totaled to see if the catch up permits extra contributions (to the maximum of twice the basic limit for the year).

__ Your 457(b) plan does not allow for the age 50 catch up contribution of IRC 414(v). Remember that the age 50+ catch up is permitted ONLY in governmental plans.

We will keep an eye on the expansion of the compliance check taken from the EPCU website which is described below.
In the meantime, financial advisors should communicate with 501(c) employers that sponsor 457(b) top hat plans to be sure the final three year catch up is being administered properly and remind the employers that a calculation will be done for any employee considering utilizing that catch up. Employers should also be reminded to review the employees included in their top hat plans, to be sure that such plans are limited only to “select highly compensated employees, managers, directors or officers.”

Description of the EPCU Expanded Project (from EPCU web site)

Recent Updates Appear to Expand the EPCU Compliance project for Non-Governmental 457(b) Plans:
Updates were also made to the non-governmental 457(b) plans project which appears to expand it beyond a check of contribution limits. For the expanded project, tax-exempt entities that filed Forms W-2 for 2011 showing contributions to a non-governmental 457(b) plan (Top Hat plan) and also filed Forms 990 are on EPCU's radar. This project is focused on verifying that the deferrals reported on the W-2 represent a 457(b) plan and that eligible participants are limited to select highly compensated employees, managers, directors or officers. EPCU will use responses to the compliance check questionnaire to determine if the sponsor is eligible to have a 457(b) plan, whether the plan contains impermissible features, and whether unforeseeable emergency distributions have been made. If EPCU finds operational errors or that the sponsor is not an eligible employer, the IRS may recommend correction through the Voluntary Correction Program (VCP) or subject the plan to examination.

Ellie Lowder, TGPC, Consultant

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.