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Employers slow to respond to voluntary IRS 403(b) plan compliance program.

Lack of compliance with Internal Revenue Code section 403(b) is a major concern for the Internal Revenue Service in the area of employee benefits, according to James J. McGovern, assistant commissioner for employee plans and exempt organizations. He told a regional employee benefits conference for practitioners that excess contributions were the most common problem with section 403 tax-sheltered annuities.

The IRS tax-sheltered annuity voluntary correction (TVC) program, established under revenue procedure 95-24 and announced in April, allows employers offering section 403(b) tax-sheltered annuities to voluntarily bring their plans into compliance with the code. They can identify and correct operational defects in their plans, pay a correction fee and any negotiated sanctions and receive a written statement that the IRS will not disqualify the plan. Disqualification of a 403(b) plan would have adverse tax consequences for covered employees.

What can be corrected

The program requires that the employer correct the defects it has identified for all years in which they exist, including closed tax years. The IRS will address only the defects noted by the employer and not look for others.

Defects for which an employer may request correction under revenue procedure 95-24 are the failure to

* Satisfy the nondiscrimination requirements under section 403(b)(12), including a failure to satisfy the nondiscrimination requirements for matching contributions and to offer the opportunity to make salary reduction contributions universally.

* Comply with the distribution restrictions, such as improper hardship distributions or distributions on plan termination.

* Satisfy the incidental death benefit rules.

* Pay minimum required distributions.

* Allow employees to elect a direct rollover.

* Satisfy section 403(b)(1)(E) (that is, to treat amounts as elective deferrals--and thus subject to the annual limit--when made in accordance with a one-time irrevocable election).

* Satisfy the nontransferability requirements of section 401(g), if applicable.

* Satisfy salary reduction agreement requirements.

* Satisfy the section 415 limitations.

Contributions in excess of the exclusion allowance set forth in section 403(b)(2) to a plan that satisfies the requirements of section 403(b) are also considered plan defects.

McGovern said he has heard that the complexity of the rules and the possibility of high costs to correct defects have discouraged employers from participating in the program. If an employer is found noncompliant, he said, claiming ignorance won't work.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1995
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