Top 403(b) Plan Errors

The demands of managing a not-for-profit organization can be challenging. There is a need to balance the passion of accomplishing the organization’s mission and the practical requirements to ensure funding exists to fuel operations. These priorities exist against the backdrop of employee recruiting, engagement and benefits administration. To attract and retain employees (a challenge for many), several Atlanta nonprofits offer 403(b) plans as a benefit. These plans are an essential tool to help with retirement savings and require careful administration.  In fact, for plans of a certain size, an annual audit is required to review plan operations and ensure compliance. While most organizations do their best to follow the rules, sometimes issues arise that are uncovered during the audit process. To help clients, prospects, and others, Wilson Lewis has provided a list of the top errors found by the IRS below.

403(b) Compliance Issues

• Excessive Contributions – The IRS found that many plans were allowing participants to contribute more than the maximum elective contribution than is permitted. This sometimes occurs when the internal controls for the plan are not effective or when participants make deferrals to multiple plans and violate the limits. Failure to identify and remedy the error may result in plan disqualification.
• Employee Exclusions – It was also uncovered that plan administrators were incorrectly denying plan participation to employees who are eligible to participate. This means the opportunity to make tax-deferred, elective contributions have been missed. To resolve the error, the improperly excluded employee must be permitted the opportunity to participate in the plan. Also, allowing for a corrective contribution to the plan that compensates for the missed deferral opportunity.
• Plan Loan Violations – The most common violations uncovered include a failure to make required payments when due resulting in default, poor loan documentation and participant loans from multiple plans which result in total participant loans exceeding established maximums. Correcting this error requires corrective payments to be made and often times a filing with one of the IRS correction programs.
• Hardship Distribution Failures – These types of errors occur when inadequate documentation exists indicating that the distribution is the result of financial hardship. It was also found that participants often violate established maximums by securing hardship distributions from different plans. The IRS allows these distributions to be taken for medical expenses, costs related to the purchase of the principal residence, educational expenses, funeral and repair expenses. Depending on circumstances, the correction may include repayment to the plan of amounts that didn’t meet the hardship distribution requirements.
• Ineligibility to Offer a Plan – While rare, it’s happened that a 403(b) plan was established for an organization that was not eligible to participate. If this discovery is made, it’s necessary to immediately stop all contributions and to make a submission to the IRS Voluntary Correction Program.

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Mistakes in the administration of a 403(b), 401(k), or other benefit plans are not uncommon. That’s why the IRS has developed various processes and programs to allow issues to be resolved. However, it’s essential to understand the rules for plan operation and ensure compliance with them. If you have questions about your 403(b) plan’s administration or need assistance with your 403(b) audit, Wilson Lewis can help! For additional information call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.