IRS Scrutinizing Private, Tax-Exempt 457(b) Plans

September 17, 2013, 02:24 PM

Between now and next September, hundreds of tax-exempt, non-governmental plan sponsors around the country will start receiving letters about their 457(b) deferred-compensation plans from the IRSs Employee Plans Compliance Unit. Only private-sector, tax-exempt entities like hospitals, credit unions, charities, and schools can maintain these types of plans. Often called top-hat plans, they allow for up to $17,500 (for 2013) of salary deferrals or employer contributions, and they must benefit only a select group of management or highly compensated employees. With these advantages, however, come pitfalls: the plans must remain unfunded and unsecured and participants may not take loans from their vested balances. The IRS wants to gather information on how employers are maintaining these tax-favored plans. The compliance questions focus on whether the employer actually is a private, tax-exempt organization, whether participation is limited to management or highly compensated employees (itself a complicated determination), and whether existing plans include any forbidden provisions like plan loans or secured funding vehicles. A sample copy of the compliance check letter can be found here. Employers will be allowed to correct any 457(b) plan violations through a process similar to the IRSs standard plan-correction program, which can involve an expensive user fee payment. But don’t stick your head in the sand: the compliance check letter warns that failing to respond could and likely will result in a plan audit. If you receive one of these compliance check letters or want to ensure your plan is compliant before you receive one please feel free to call our experienced employee benefits attorneys to help guide you through the process. –Robert Q. Johnson