1
IRS AUDIT CHECKLIST FOR 403(b)s & 457(b)s
Years under examination: (For use by IRS beginning with the 2009 year)
The first meeting for the examination of your plans will be a conference to discuss what is to be examined and who will be responsible for providing the information needed in the future. Please have the personnel available for the meeting who can discuss the below items.
Areas for discussion will be the following: IRC 457 Plans
1. What is your procedure for keeping track of the multiple contribution limits under IRC 457(b):
1.1. Regular Limit
1.2. 3 Year prior to NRA catch-up years
1.3. Years prior to NRA catch-up underutilization for participants in both IRC
403(b), 401(k) and 457(b) plan till year end 2001
1.4. Years prior to NRA catch-up underutilization for participants in only 457(b)
plan
1.5. Age 50 catch-up
2. Describe your capabilities for the following:
2.1. Monitoring contribution limits for deferrals and catch-up contributions
(i.e., IRC 457(e)(15), age 50 or over Code section 414(v) catch-up contributions and special 457 make-up contributions);
2.2. Monitoring compensation limits.
2.3. How do you address violations for any of the testing covered in question?
(Excess are discovered and amended W-2 and Forms 1099 are issued by whom)
3. What year did the employer offer an eligible 457(b) plan to the plan participants? 4. What is the procedure for a Participant to make an election for their Normal
Retirement Age?
5. If a participant may make an election from a range of Normal Retirement Ages based on the Normal Retirement Age under the Defined Benefit Plan what are the Normal Retirement Ages available to the Participants? (City Employees, School Employees, Firefighter Employees and Police Department Employees)
2
years prior to the year the employee can start receiving their NRA benefit without reduced benefits under the DB Plan?
7. Once a participant t has made an election of the Normal Retirement Age is the election irrevocable?
8. How is the underutilization amount calculated and who does the calculation? 9. Is the underutilization amount calculated from date that is the later of:
9.1. the year the employer offered an eligible 457(b) to the participant or
9.2. the taxable year beginning after December 31, 1978 or
9.3. the date of hire of the participant
10. When a calculation of the underutilization limitation is done does it include elective contributions, salary reductions, or non-elective employer contributions for years prior to 2002 for a participant who had participated in a 457(b), 401(k), 402(h)(1)(B), 403(b) or a 408(p) plan?
11. If participant may make an election from a range of Normal Retirement Ages based on the Normal Retirement Age under the Defined Benefit Plan and has not made an election for their Normal Retirement Age and wants to use either the three year prior to Normal Retirement Age catch-up or the Age 50 catch-up is the participant required to use the catch-up that provides the greater limitation?
12. If the IRC 457(b) eligible plan is sponsored by a tax exempt employer is the plan unfunded and no assets are set aside for participants or beneficiaries?
13. If the IRC 457(b) eligible plan is sponsored by a tax exempt employer are all amounts deferred under the plan, all property and rights to property purchased with such deferral amounts and all income attributable to such amounts solely the property of the tax exempt employer and subject to the claims of the employer’s general
creditors?
14. If the IRC 457(b) eligible plan is sponsored by a tax exempt employer are only
members of management and highly compensated employees eligible to participate? 15. How are excess IRC 457 and IRC 415 discovered and who provides the amended W-2
or 1099 forms?
16. What is your procedure for keeping track of Unforeseeable Emergency Distributions? 16.1.1 Are distributions in the form of Unforeseeable Emergency Distributions
allowed?
16.1.2 If Unforeseeable Emergency Distributions are provided who will provide to the Agent:
16.1.2.1 List of all plan participants who received Unforeseeable Emergency Distributions for the years under examination.
3
16.1.2.3 Copies of back-up information to verify the participants Unforeseeable Emergency Distributions is qualified.
16.1.2.4 Copy of form 1099
16.1.2.5 Date Unforeseeable Emergency Distributions occurred
16.1.2.6 Description of the procedures for applying for an Unforeseeable Emergency Distributions
16.1.3 If the Vendor allows Unforeseeable Emergency Distributions is the Vendor’s procedure that the participants must provide verification that the need for the withdrawal cannot be reasonably relieved:
16.1.3.1 Through reimbursement or compensation by insurance, 16.1.3.2 By liquidation of employee’s assets,
16.1.3.3 By cessation of elective contributions or employee contributions under the plan,
16.1.3.4 Or by other distributions or nontaxable (at the time of the loan) loans from plans maintained by the employer or by any other employer, or by
borrowing from commercial sources on reasonable commercial terms, in an amount sufficient to satisfy the need.
16.1.4 If the Vendor allows Unforeseeable Emergency Distributions are they only allowed because of:
16.1.4.1 Uninsured medical expenses for self, spouse or dependent(s)
16.1.4.2 Loss of property due to casualty (including the need to rebuild a home following damage to a home not otherwise cove red by homeowner’s insurance, e.g., as a result of a natural disaster
16.1.4.3 Prevention of eviction from or mortgage foreclosure on primary residence 16.1.4.4 Need to pay for the funeral expenses of the Participant’s spouse or
dependent
16.1.4.5 Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
17. Please provide a copy of the Trust for the IRC 457(b) established by January 1, 1999 in the employers name to hold the assets for the exclusive benefit of the employees. 18. Please provide a copy of the enabling statute which lists what are acceptable
investments.
19. Does the employer report 457 plan assets under the Government Accounting
4
IRC 403(b) PLANS
20. What is your procedure for keeping track of the multiple contribution limits under IRC 403(b):
20.1 Regular Limit
20.2 Years of Service Catch-up 15 year Service
20.3 Catch-up Lifetime limit of $15,000
20.4 15 year Service Catch-up limit for $5,000 times years of Service rule
20.5 15 year Service Catch-up limitation $5,000 times years of Service rule when
a 401(k) plan is also involved or a 457(b) plan is involved prior to 2002.
20.6 Applying Service catch-up prior to age catch-up for the 15 years of Service
Rule.
20.7 Age Catch-up Limit
21. Describe your capabilities for the following:
21.1 Monitoring contribution limits for deferrals and catch-up contribution (i.e.
IRC 402(g). IRC 415, over age 50 Code Section 414(v) catch-up contributions.
21.2 Monitoring compensation limits.
21.3 Counting years of Service for permanent part-time employees (.75, .50 and .25), substitute teachers, temporary employees, retired rehired teachers and regular part-time employees.
21.4 How do you address violations for any of the testing covered in question?
(Excess are discovered and amended forms W-2 and Form 1099 are issued by who)
22. Describe your capabilities for the following:
22.1 Monitoring compensation limits.
22.2 Counting years of Service for permanent part-time employees (.75, .50 and
.25), substitute employees, temporary employees, retired rehired employees and regular part-time employees.
22.3 How do you address violations for any of the testing covered in question?
5
23. What is your procedure for keeping track of hardship distributions? 23.1.1 Are distributions in the form of Hardship withdrawal allowed?
23.1.2 If Hardship distributions are permitted who will provide to the Agent: 23.1.2.1. List all plan participants who received hardship distributions for the years
under examination.
23.1.2.2 Copy of the hardship event application.
23.1.2.3 Copies of back-up information to verify the participant’s hardship is qualified.
23.1.2.4 Copy of form 1099
23.1.2.5 Date Hardship distribution occurred
23.1.2.6 Description of the procedures for applying for a hardship distribution. 23.1.2.7 The List provided to the Employer/Plan Sponsor that notifies that salary
deferrals need to be suspended for 6 months for the participant.
23.1.2.8 Letters provided to employees in that notifies that salary deferrals need to be suspended for 6 months.
23.1.2.9 Letters provided to employees in that notifies that salary deferrals may be resumed after the 6 month period has expired.
23.1.3 If the Vendor allows Hardship withdrawal is the Vendor’s procedure that the participants must provide verification that the need for the withdrawal cannot be reasonably relieved:
23.1.3.1 Through reimbursement or compensation by insurance, 23.1.3.2 By liquidation of employee’s assets,
23.1.3.3 By cessation of elective contributions or employee contributions under the plan,
23.1.3.4 Or by other distributions or nontaxable (at the time of the loan) loans from plans maintained by the employer or by any other employer, or by
borrowing from commercial sources on reasonable commercial terms, in an amount sufficient to satisfy the need.
23.1.4 If the Vendor allows Hardship Distributions are they allowed only because of:
23.1.4.1 Uninsured medical expenses for self, spouse or dependent(s) 23.1.4.2 Purchase of primary residence (not including mortgage payments) 23.1.4.3 Prevention of eviction from or mortgage foreclosure on primary
residence
23.1.4.4 Payment of post-secondary tuition for self, spouse or dependent’s
non-6
periodic distribution has occurred and that withholding rules and early distribution rules apply?
24. What is your procedure for keeping track of Universal Availability?
24.1.1 What are your procedures for deciding whether an employee is eligible to participate in any of the retirement plans/
24.1.2 What types of employees are not allowed to participate in any of the retirement plans?
24.1.3 What employees are allowed to participate in the IRC 403(b), 401(k) and the IRC 457 Plan?
24.1.4 What are your procedures and what paperwork is provided to an employee to make an election to make salary deferrals to a plan?
24.1.5 What are the procedures for keeping track of an employee who is in the IRC 457, 401(k) and IRC 403(b) plan?
24.1.6 How many days are required to be worked by an employee to be considered a full time employee?
25. What is your procedure for keeping track of Vendor reviews so that the following information is provided to the Plan Sponsor to verify you are using a qualified IRC 403(b) document and that the vendor is complying with the applicable tax laws? 25.1.1 Are annuity contracts purchased from an insurance company?
25.1.2 Are custodial accounts invested exclusively in regulated investment company stock?
25.1.3 Does the written information provided by the Vendor to the participants of the Plan have the required language to satisfy the requirements of IRC 401(g) and IRC 403(b)(1) that an annuity contract which is purchased after 1972 will be expressly nontransferable, and cannot be assigned, sold, or pledged as collateral?
25.1.4 Does the written information provided by the Vendor to the participants of the Plan have the required language to satisfy the requirements of IRC 403(b)(1)(E) and 402(g) that the annuity contracts and custodial accounts will provide that elective deferrals made will not exceed the annual limit on deferrals?
7
contracts and Custodial accounts will provide that distributions of at least a minimum amount will be made, upon attainment of certain ages?
25.1.6 Does the information provided by the Vendor to the participants of the Plan satisfy the requirements of IRC 401(a)(31) and IRC 402(f) and 403(b)(10) that annuity contracts and Custodial accounts will provide that any distribution will provide to the distributed participant a meaningful opportunity to elect rollover provisions?
8
Both IRC 403(b) and IRC 457 Plans
26. What is your procedure for keeping track of Salary Deferrals and Contributions? 26.1.1 What is your procedure for submitting employee’s deferrals to the vendors
or plan and how often the deferrals are submitted?
26.1.2 What is your procedure for submitting contributions to the vendors and how often are the contributions submitted?
26.1.3 Who will provide a list of total salary deferrals and contributions for the years under examination?
26.1.4 Who will provide a summary of all the Vendors used and how many participants are using each vendor?
27. What is your procedure for keeping track of Loans and Deemed distributions of Loans? 27.1.1 Does the Vendor allow distributions in the form of loan withdrawals? 27.1.2 If Loan distributions are provided who will provide to the Agent: 27.1.2.1 Copy of loan agreements for years under audit
27.1.2.2 Copy of repayment for all years of loan
27.1.2.3 If a deemed distribution occurred a copy of Form 1099 27.1.2.4 Date deemed distribution occurred
27.1.2.5 Are the Vendor procedures for handling loan deemed distributions to issue the Form 1099 and to provide to the participant a notice explaining a non-periodic distribution has occurred and that withholding rules and early distribution rules apply?
28. What is your procedure for keeping track of Vendor reviews so that the following information is provided to the Plan Sponsor to verify you are using a qualified IRC 457(b) or 403(b) and that the vendor is complying with applicable tax laws? 28.1.1 What are the Vendor procedures when providing distribution of periodic
distributions when a participant is retired?
28.1.2 What are the Vendor procedures when providing distribution of non-periodic distributions?
9
28.2 Is a report provided to the Plan Sponsor explaining how the Vendor handles,
including timing, how their system process the following distributions or does a third party administrator provide these services:
28.2.1 lump-sum distributions
28.2.2 systematic payments/installments 28.2.3 annuities
28.2.4 rollovers to an eligible retirement plan 28.2.5 required minimum distributions, and
28.2.6 Distributions of participant accounts under $5,000, including distributions of under $5,000 to “deemed IRAs.”
28.2.7 Loans
28.2.8 Unforeseeable emergencies
28.2.9 Excess deferrals and excess contributions for IRC 457(b) plans (i.e., IRC 457(e)(15), age 50 or three prior to Normal Retirement Age over 414(v) catch-up contributions.
28.2.10 Describe how the third party administrator or the vendors system handle Federal and State tax reporting for all the items (i.e., Forms 1099-R). 29. What is the procedure for notifying Vendors of new procedures?
30. How do you ensure that your record keeping system is in compliance? How do you keep informed and updated on any regulatory and legislative changes affecting IRC 457(b) and IRC 403(b) plans?
31. How is unused sick leave and unused vacation applied at year end when an employee is still employed?
32. How is unused sick leave and unused vacation applied when an employee terminates service or retires?
33. Does the Plan allow QDRO and who administers this program?
34. Do any plans or arrangements file form 5500? If so please provide a copy for this meeting.
35. Of the plans or arrangements that do not file form 5500 please provide a list and explain why the form is not applicable.
36. What types of computer records are maintained to keep track for Forms W-2, W-3, and Forms 10909, 940 and 941 and the master payroll files?
37. How is employee assigned payroll identification codes?
38. Please provide a list of all payroll identification codes and what each code represents. 39. Please provide a list of any individual employee who has an employment contract.
(Example: Superintendent of the School System)
10
41. Please provide a list of any qualified and non-qualified plans or contracts you sponsor. (Examples)
41.1 IRC 401(a) Plans (Defined Benefit, IRC 401(k), etc.)
41.2 IRC 414(h) Plans
41.3 Mandatory Employee Contribution IRC 403(B) Plans
(Sick and Vacation Plans)
41.4 One Time Irrevocable Employee Election Plans. (How do you handle for
Medicare and on the Form W-2)
41.5 Employer Contribution Plans
41.6 IRC 403(b) Salary Deferral Arrangements
41.7 IRC 403 Supplement Plan,
41.8 IRC 457 Eligible and Ineligible Plans,
41.9 Severance Contracts,
41.10 Vacation Leave or Sick Leave Plans,
41.11 Compensatory Plans
41.12 Disability Pay Plans
41.13 Qualified Governmental Excess Benefit Arrangements,
41.14 Death Benefit Plans
41.15 Supplemental Retirement Contracts or Programs,
41.16 Cash Accumulation Contracts or Plans,
41.17 Capital Appreciation Plans
41.18 Employment Contracts,
41.19 Performance of Service Contracts,
41.20 Contracts Not to Compete,
41.21 Executive-Flexible Benefit Arrangements
41.22 Physicians Flexible Benefit Arrangements
41.23 Loans Programs
41.24 Post Termination Consulting Arrangements
41.25 Early Retirement Incentive Programs,
41.26 Retirement Incentive Plans
41.27 Contracts for Highly Compensated Employees (CEO, CFO Head Coaches,
etc.)
41.28 Union Contracts
