So, what are some of the internal controls the IRS might have in mind? 

 

• Human Resources procedures:  

 

• Certainly, having your 403(b) “written plan” in place is important, but that may only be the first step.  An IRS auditor also may request the most recent version of your employee handbook to compare against the terms of your 403(b) plan.  Take the time now – before an IRS audit – to resolve discrepancies between the plan document and the employee handbook.  Keep in mind that the 403(b) plan should reflect both your operating procedures and the IRS rules.  

 

• Be prepared to provide samples of the annual “universal availability” notice sent each year, plus documentation of the distribution list of eligible employees, regardless of whether they were currently participating in the 403(b) plan.  

 

• Payroll procedures:    Establish payroll procedures to monitor employee deferrals against the annual IRS deferral limit.  If employees are making catch-up contributions, maintain catch-up calculation worksheets to assess whether those catch-ups conform to the IRS-permitted limits.

 

• Procedures to coordinate with your service providers:  

 

• Confirm that employees’ contributions are transferred to the authorized investment providers in accordance with the timeframes permitted under the IRS regulations.  Amounts are only considered to be under the plan when received by the investment –provides.  If the plan uses a common remitter service, determine how quickly the remitter sends contributions to its investment providers.  

 

• Demonstrate that your investment providers are sharing information with you (or your TPA, if you have delegated this function) to confirm that the participant is eligible for the disbursement before processing a participant’s request for a loan, hardship, or distribution due to severance of employment.  Be prepared to show your internal procedures and information sharing agreements with the plan’s investment providers. 

 

Anticipating the lines of inquiry in advance of an IRS audit is the best preparation you can take.  Make your own list of internal controls and check it twice to determine if you are able to produce documentation for each of the above internal controls.  Any disconnects between the plan document and your internal procedures could highlight either document or operational defects to an IRS auditor.  Even if your 403(b) plan is not under examination, this serves as a good reminder to review your plan so that you can identify and fix any outstanding issues in the event of a potential audit in the future.  The IRS has indicated that a 403(b) plan with the proper internal controls will be perceived as having greater credibility for operating in an IRS-compliant environment. 

 

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Linda Segal Blinn, J.D.*, is vice president of Technical Services for ING U.S. Retirement.  In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans.  A contributing author to several publications, Blinn also speaks frequently at industry associations meetings on retirement plan issues facing K-12 schools, higher educational institutions, and non-profit entities.  Contact Linda at (860) 580-1643 or LindaSegal.Blinn@us.ing.com

This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice.  The services of an appropriate professional should be sought regarding your individual situation.  These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document.  The taxpayer should seek advice from an independent tax advisor.

* Linda is not a practicing attorney.