The IRS issued the following listing of recurring mistakes noted in 403(b) plan audits:
1. Failure to be a qualified employer – Only public schools and certain tax-exempt charitable organizations qualify.
2. Failure to properly apply universal availability –This occurs when eligible employees are excluded from participation.
3. Failure to limit employee elective deferrals – The general limit on employee elective deferrals was $16,500 in 2010. Under certain conditions, catch-up contributions are permitted.
4. Failure to return timely excess elective deferrals and earnings – These must be distributed to employees no later than April 15th of the following year to avoid additional taxes and penalties for the employer and employee.
5. Failure to properly withhold and report withholdings on Form 941 – If excess deferral contributions are allowed, taxable wages are under reported on quarterly employment tax returns.
6. Failure to identify and report defaulted loans – These may be deemed as taxable distributions that should be reported to the employee as income.
7. Failure to satisfy hardship distribution requirements – If certain conditions are not present and properly documented, hardship distributions may instead be classified as premature distributions which have different tax implications.
So what should an organization do if they discover a plan error? There are programs in place to correct these mistakes, and you should consult your CPA for assistance. Information on the Employee Plans Compliance Resolution System is available at www.irs.gov/ep.
Jessica Puckett, CPA, CFE