New IRS Regulations, IRS Audits

We are expecting the new IRS 403(b) regulations within the next few weeks. Well, we've heard that before, but reliable sources tell us it will really happen this time.

One of the concerns for 501(c)(3) ministries is the possibility of future IRS audits. Below are some highlights from a recent IRS presentation pinpointing some of the items they are looking for in their audits.

Again, our goal is to keep you up to speed with what we are hearing.


What the IRS Looks for in 403(b) Audits (and they are coming)

Even though the final 403(b) regulations have not been released, the IRS has stepped up its audits of 403(b) programs. In fact, Robert Architect of the IRS, in recent comments to the National Tax Sheltered Accounts Association (NTSAA), listed six areas of focus when their auditors examine a 403(b) program:

1. Excess Elective Deferral Contributions:
Employees continue to contribute too much to their 403(b) account. It is important that you watch for over contributions. Not likely for most but an issue for some. (2007 limits are $15,500 plus $4000 for over 50 catch-up)

2. Universal Availability:
This continues to be a major area of concern. The IRS has repeatedly found that employees were impermissibly excluded from participating in the plan. Support staff, such as support team workers, some office staff and others, have very low rates of participation. In many cases they are not regularly informed of their right to make salary deferrals.

The IRS has instituted a series of "questionnaires" to public school districts in several states. We can look forward to this kind of scrutiny in the future for 501(c)(3) ministries. Employers who indicate that they exclude these classes of employees, or who do not notify them of their right to participate, receive a follow-up letter that calls for substantial employer 403(b) makeup contributions.

The letter suggests making a contribution equal to one and one-half percent of compensation for all prior years for each employee who was excluded. It is vital that all employers review their policies and make sure all employees who are eligible to participate receive an annual notice explaining that right.

3. Plan Loans in Excess of Permitted Amounts:
All loans in all retirement plans, such as 457 plans, must be counted in applying the limits.

4. Impermissible Hardship Withdrawals:
The tax code is very strict as to the amount that can be withdrawn for a hardship and under what circumstances. Yet too many employees treat their 403(b) accounts as if they were a savings account.

5. Contract Provisions:
The IRS agent will review contract provisions of annuity policies and custodial accounts to make sure they permit the practices in operations. For example, do the contracts permit loans?

6. Ineligible Employers:
Not all not-for-profits are eligible to offer a 403(b) program. Only 501(c)(3) organizations are eligible. Yet the IRS continues to find ineligible not-for-profits offering these programs. This issue does not apply to public school districts.

These are just some of the issues we are hearing about and want to make sure that you are informed about what we are hearing from the IRS as it relates to retirement plans and audits. No need to be alarmed, this is just part of our continuing education program to make sure we are on the same page with the appropriate governmental departments. Don't forget, our ministry is to serve your ministry.

We'll be sending more as information on the new regulations is released. Stay tuned.

Seize the day as we labor in His service and experience His joy!

In the meantime, if you have questions about your retirement plan or implementing one for your ministry, we're here to help however we are able. Contact us at (888) 879-1376, ext. 209 or .

Envoy Financial
Trusted Advice Along The Way