Clues a Form W-2 Provides About a 403(b) Plan

When the IRS audits a 403(b) plan, the pre-contact analysis includes a review of the Form W-2 (Wage and Tax Statement) for the year of the audit. According to the IRS 403(b) Examination Guidelines, an IRS auditor may be able to “identify potentially significant issues” with a 403(b) plan by analyzing the Form W-2. Here are two:

1. Proper reporting of employee deferrals and non-salary reduction contributions is indicative of the employer’s internal controls.

Only contributions that are pre-tax deferrals and (if permitted under the 403(b) plan) Roth 403(b) contributions should be reported in Box 12 of the Form W-2.  

Any other contributions—for example, employer contributions or mandatory employee contributions under a governmental plan—are not reported in Box 12. An employer may, but is not required to, report those contributions in Box 14 (Other) of the Form W-2. 

When auditing a 403(b) plan, the IRS auditor may request a sampling of W-2s to verify that only elective deferrals have been reported in Box 12. The W-2s also enable an IRS examiner to assess whether an employer’s payroll system contribution reporting aligns with the human resources records. As the IRS 403(b) Examination Guidelines note, “Discrepancies should be explained, and if significant, investigated further.”   

2. Proper reporting of employee deferrals indicates whether a participant has exceed the annual IRS elective deferral limit.

Amount of elective deferrals reported in Box 12 of the Form W-2 may indicate 403(b) plan design—namely, whether the 403(b) plan permits the Age 50+ catch-up and/or (if applicable) the 15 Years of Service catch-up. If either of these catch-ups are permitted, there should be a provision describing the feature in the written 403(b) plan.

An employer is also responsible to ensuring that a participant’s elective deferrals to the 403(b) plan do not exceed the annual IRS limit (factoring in any available catch-ups). An IRS examiner will review Box 12 of the W-2 to determine if a participant’s contributions are in excess of the IRS annual deferral limit.

Best Practices for 403(b) Plan Sponsors

• Maintain internal protocols for the payroll department (and payroll provider, if applicable) to ensure data integrity. 
• Compare human resources participant records (including employee data of birth, eligibility for catch-ups, etc.) with payroll data reflecting a participant’s annual deferrals to the 403(b) plan. 

Resources

• IRS 403(b) Examination Guidelines: https://www.irs.gov/irm/part4/irm_04-072-013
• “2021 General Instructions for Forms W-2 and W-3”: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf   
• IRS webpage “Policies, Procedures and Internal Controls Self-Audits”: https://www.irs.gov/retirement-plans/policies-procedures-and-internal-controls-self-audit

Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 30 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.

This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.

* Linda is not a practicing attorney for Voya Financial.

Copyright 2021, Voya Financial. Used by permission. This originally appeared here.

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