Be prepared for a 403(b) plan audit from the IRS

By Thomas H. Giedgowd, CPA, MS
Carroll Consultants, Ltd.

The 403(b) final regulations required 403(b) plan sponsors to have a written plan in place effective January 1, 2009 and to operate the plan according to the terms of the document. The Internal Revenue Service (IRS) is continuing to audit 403(b) plans. Be Prepared – the IRS may request numerous documents and information relating to your 403(b) plan. Here are some points that will hopefully help you if the IRS comes knocking on your school’s door:

How will I be notified that the IRS intends to audit our 403(b) plan?
If the IRS intends to audit your 403(b) plan, you will either receive a letter from the IRS or a phone call from an IRS agent. The IRS will inform the plan sponsor of the plan year to be audited. Subsequent information and data will be requested via IRS Form 4564, entitled “Information Document Requests” (IDR’s).

What information is the IRS looking for?

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will be looking for specific documentation including information about the policies and procedures for 403(b) plan administration. The agent will be interested in information about the plan including plan documents, Form 5500, plan amendments, compliance

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testing, investments, and payroll contributions.

What are some issues found by IRS agents when auditing 403(b) plans?
– Plan contributions in excess of the 402(g) and 415 limit
– 15 years of service and age 50 catch-up contributions not properly applied
– Mandatory Deferrals and Elective Deferrals not properly reflected on Form W-2 (Elective Deferrals should be listed in Box 12 and Mandatory Deferrals should be listed in Box 14)
– Employer Matching and/or Non-Elective Contribution not calculated using the correct salary or formula
– Excluding eligible employees from plan participation
– Loans from the plan that do not comply with Code rules
– Distributions made to participants that do not comply with Code rules