Have you made a mistake in administering your 403(b) plan? Does this mistake put you at risk of IRS action? If so, you are not alone — not only in the sense that others have made mistakes, but also because the IRS has updated its 403(b) Plan Fix-It Guide, a resource that tells plan sponsors how to identify errors in 403(b) administration and correct them. Equally important: the IRS also says how to avoid the mistake in the first place.
For instance, suppose a plan offers 15 years of service catch-up contributions, and allows an employee who has not been with the employer for 15 years yet to make the contributions.
- A plan sponsor can find the error by reviewing total deferrals each participant made.
- If they exceed the limit established under Section 402(g) of the Internal Revenue Code, it can determine if this is because of a catch-up contribution. If it is, the plan sponsor must determine if the employee meets the 15-year employment threshold.
- The plan would need to refund excess deferrals and earnings, and report the corrections on Form 1099-R.
- To head off this error in the first place, a plan should verify that employees are eligible for the catch-up by ensuring that they have 15+ years of service, have unused amounts available for catch-up and have not exceeded the $15,000 lifetime limit. Before allowing participants to make 15 years of service catch-up contributions, a plan should ensure that the written program contains the proper language.
For another example, suppose a 403(b) plan doesn’t limit elective deferrals such as catch-ups and Roth contributions, to the amount the law sets for a calendar year.
- A plan sponsor can find this error by tracking deferrals and conducting year-end reviews in which it compares deferrals to the Section 402(g) limits.
- To fix the mistake, the plan would need to refund the excess deferrals and earnings, and report the corrections on Form 1099-R.
- To avoid this mistake, an employer should establish procedures such as how to limit deferrals, educate employees and conduct year-end reviews of deferrals.
The guide provides detailed information on handling 10 kinds of errors.
John Iekel is Senior Writer and Editor for the NTSA Net portal.
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