Summary of Federal Laws
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Tax Issues Related to Employment
Retirement and Other Deferred Compensation Arrangements
IRS Employee Plans Compliance Unit web page: 403(b) Universal Availability Higher Education
The Universal Availability rule provides that if any employee is permitted to make elective salary deferrals to a 403(b) plan, then all employees, with limited optional exclusions, must be provided the same opportunity.This page describes a compliance project the IRS will undertake with randomly chosen schools to review compliance with the universal availability/written plan document requirements now in effect.
IRS Guidance on 12/9 month payments
The question of whether or not a university policy that allows faculty who work nine months to be paid over 12 months consitutes deferred compensation was addressed by the IRS in Notice 2008-62. The IRS will be publishing regulations on the issue, but schools can follow this notice in anticipation of the new rules. The rule will likely state that a 12 month payment is not deferred compensation if:
(1) the arrangement does not defer payment of any of the recurring part-year compensation beyond the last day of the 13th month following the beginning of the service period and
(2) does not defer from one taxable year to the next taxable year the payment of more than the applicable dollar amount under § 402(g)(1)(B) in effect for the calendar year in which the service period begins ($15,500 for 2008).
Final Rule: Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts, 72 Fed. Reg. 41127 July 26, 2007
This is the first major overhaul of the 403(b) regulations since 1964. If a Collective Bargaining Agreement covers a 403(b) plan and the CBA is ratified and in effect on July 26, 2007, then the regulations will not apply until the earlier of the date the CBA terminates or July 26, 2010. Under the new regulations, any 403(b) program must be in writing. The new rules allow 403(b) programs to be terminated under certain conditions, thus a school could more easily make the switch to 401(k) plan. See To Be or Not to 403(b): That is the Question by Drinker Biddle, which was published in two parts: July 2007 and August 2007. The August 2007 newsletter contains a very helpful chart which addresses the written documentation, universal availability, plan termination, and more. See also the IRS guide to 403(b) Tax Sheltered Annuity Plans. For an overview of the new reporting and audit requirements, see McDermott Will & Emery's April 16, 2008 newsletter titled: 403(b) Plan Sponsors Subject to New Reporting and Audit Requirements.
26 CFR 301.6058-1 sets forth the requirements for the annual information return that must be filed each year on funded plans of deferred compensation. Form 5500 is the form used for this report.
Mandatory Contributions to §403(b) Plan Are Salary Reduction Contributions for FICA Tax Purposes
See 2003 IRS technical advice memorandum (TAM 200305006) which advised that 403(b) contributions were salary reduction contributions, even though the contributions were mandatory. Employees had argued that the mandatory nature of the contributions made them not subject to the FICA tax.
Penalties for Failure to Comply with Certain Information Reporting Requirements
These sections contain the penalties for failure to comply with information reporting requirements on or before the time prescribed, failure to file the correct information required or all the information required, and failure to furnish correct payee statements. The penalty is generally $50 for each return, with opportunity for reduction of the penalty for correcting the error. When filing by magnetic media, the failure must occur with respect to more than 250 information returns. See I.R.C. § 6724(c). This means universities should take care when collecting and reporting social security numbers under various tax related reporting requirements.
Resources and Publications
403(b) Plans: A Guide for Section 501(c)(3) Organizations (ING January 2011)
Highlights for Employers on the final 403(b) Regulations. This is a new version of IRS Publication 4483. This includes a section on Common Mistakes made by employers with respect to 403(b) Tax Sheltered Annuity Plans.
On July 26, 2007, the IRS issued the first comprehensive regulations governing 403(b) plans in over forty-three years. Key changes/clarifications include a plan document requirement, non-discrimination rules, post-retirement contributions, in-service withdrawals, transfers and exchanges, timely remittance, plan terminiation, and controlled group rules.
udated 5/4/14 mlo