In an effort to make 403(b) plan sponsors aware of common mistakes made by not-for-profit entities and educational institutions administering such plans, in December 2013 the IRS updated two publications that relate to such plans. According to the IRS, “It is important to know the tax rules that apply to your 403(b) plan and to pay attention to the operation of your plan so you can maximize your employees’ retirement benefits, comply with the law, and avoid additional taxes and penalties.”
The publications – Publication 4482, 403(b) Tax-Sheltered Annuities for Participants and Publication 4483, 403(b) Tax-Sheltered Annuity Plans for Sponsors – list mistakes the agency commonly finds in these plans. In addition, 4482 also provides an overview of 403(b) plan features. The other publication offers information on several IRS products and services available to assist plan sponsors in keeping things running smoothly.
Among the “common mistakes” found by the IRS are those related to:
- Written plan requirements – All employers sponsoring plans must have written documents that describe the plan and current operations.
- Universal availability – Employers must allow all employees the same opportunity to defer as of their date of hire. (Note that certain groups of employees, such as those working fewer than 20 hours per week, may be excluded.)
- Depositing elective deferrals – Employees' contributions must be deposited as soon as is reasonable (DOL provides that employee contributions should be deposited the same day as payroll).
- Excessive elective deferrals – The general limit on elective deferrals is $17,500 in 2014. If the plan allows, employees may also make catch-up contributions related to years of service and/or if they are over age 50.
- Contribution limits and catch-ups – Contributions must stay under the applicable general, age 50 catch-up and 15-years-of-service catch-up contribution limits. Any excess elective deferrals must be returned by the following April 15th to avoid additional taxes and penalties.
The IRS (www.irs.gov/retirement) offers a variety of online tools and publications that address 403(b) plans, other retirement plans and correction programs, including:
- Publication 15, Circular E, Employer’s Tax Guide
- Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations
- Publication 575, Pension and Annuity Income
- Publication 590, Individual Retirement Arrangements (IRAs)
- Publication 4224, Retirement Plan Correction Programs
- Publication 4482, 403(b) Tax-Sheltered Annuities for Participants
- Publication 4484, Choose a Retirement Plan
- Publication 4546, 403(b) Plan Checklist
Another valuable resource is the IRS’ Fix-It Guide (http://www.irs.gov/Retirement-Plans/403(b)-Plan-Fix-It-Guide), which describes specific mistakes and offers tips on fixing them, and ultimately avoiding the problem in the future. Correcting mistakes in a timely manner helps plan sponsors avoid additional taxes and penalties that may affect both employer and employee. For more information, contact us here.
Bernard Kaplan is a Managing Director at CBIZ Tofias and leader of the Retirement Plan Services Practice. He can be reached at 617.761.0541 or Bkaplan@cbiztofias.com. Bernie consults on a wide variety of employee benefit topics including 457 and 403(b) plans, qualified retirement plans, executive compensation, nonqualified deferred compensation, section 409A and health care reform.