The IRS is focusing on top hat plans at nonprofit 501(c) organizations, a recent “compliance check” questionnaire from the agency’s Employee Plans Compliance Unit reveals. Plans include sending letters and questionnaires to nonprofits seeking a range of information, according to Linda Segal Blinn of ING’s Tax-Exempt Markets group.
While both governmental and nonprofit employers can sponsor a 457(b) plan, the tax code rules differ depending on the type of plan sponsor. Unlike their governmental counterparts, nonprofit organizations offering 457(b) plans:
• can only extend eligibility to select management and highly compensated employees and independent contractors;
• must hold amounts contributed to a top hat 457(b) plan as the organization’s assets — subject to that employer’s general creditors — until those amounts are paid or made available to the participant; and
• can’t permit an age 50+ catch-up or Roth 457 contribution, loans, or rollovers into or out of the plan.
The IRS expects to send a compliance questionnaire to approximately 200 non-profit organizations nationwide in fiscal year 2013 (which ends on Sept. 30) and an additional 200 in fiscal year 2014. Plan sponsors receiving the compliance check can expect the questions to focus on five issues:
1. Verification that the deferrals reported to the IRS on Form W?2 were made to a 457(b) plan.
2. Determination of the employer’s eligibility to sponsor a 457(b) plan.
3. Confirmation that participation in the 457(b) plan is limited to the top hat group.
4. Validation that the 457(b) plan is not operating under the rules applicable to governmental 457(b) plans.
5. Identification of unforeseeable emergency withdrawals.
While the compliance check is not a formal plan examination, Blinn notes, if the IRS determines that the plan is not operating in accordance with plan rules, the next step could be auditing the plan or recommending corrective action under the IRS’ Voluntary Compliance Program.
