Highlights of the 403(b) Examination Guidelines, as Adopted by the Internal Revenue Service, May, 1999 (Posted on June 23, 1999 by )


Carol V. Calhoun, Counsel
Venable LLP
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Carol V. Calhoun

  • Explicit recognition that a 403(b) arrangement may have no “plan documents” other than the annuity contracts or other funding vehicles.

  • IRS won’t impose income taxes (though it will impose FICA, FUTA, and excise taxes) for problems corrected under APRSC, TVC. or Audit CAP. Distinction between annuity and custodial account; excess contributions to custodial account, but not those to annuity, give rise to excise tax.

  • In-home teaching services can be covered under 403(b).

  • Covering nonemployee will not disqualify whole plan, but only eliminate the exclusion allowance for that individual.

  • 403(b) can only cover common law employees of an eligible employer. Thus, university cannot cover individuals who are common law employees of a taxable research affiliate, even if they are paid on the university payroll.

  • Nondiscrimination tests for salary reduction contributions tested on an employer basis, not a controlled group basis.

  • Imposition of a minimum percentage of compensation as a deferral violates nondiscrimination rules.

  • Confirmation that pre-1987 account balances must be distributed by the end of the calendar year in which the participant turns 75 or, if later, April 1 of the calendar year immediately following the calendar year in which the participant retires.

  • Confirmation that hardship withdrawal rules of section 401(k), not the tougher ones applicable under section 457, can be used.

  • No requirement that a 403(b) contract permit transfers (other than direct rollovers). Thus, if funding vehicle choices are limited (e.g., to ensure that adequate disclosures are made), it would be possible to require that amounts not be transferrable to nonapproved vehicles.

  • Distinction between problems affecting the whole plan, ones which affect only the particular contract, and ones which affect only certain contributions. For example, an ineligible employer or failure to comply with the universal coverage requirements would disqualify the whole plan, including all annuity contracts and custodial accounts. Making an impermissible distribution would disqualify only the contract from which the impermissible distribution was made. (Note, though, that the whole contract rather than just the distributed amount would be penalized.) Contributions to an annuity contract in excess of the exclusion allowance would not be excludable, but would not cause problems for the rest of the annuity contract.

  • Cannot defer, or treat as includible compensation, amounts accrued in prior years. For example, if all accrued but unpaid sick leave is paid off at retirement, only the amount accrued in the year of retirement can be counted.

  • In the absence of a “C” election, 403(b) is aggregated with a Keogh maintained by an entity controlled by the employee in applying maximum limits. May be a particular issue for medical faculty.

  • 415(e) limits still apply this year.

  • Improperly excluding contributions to qualified plans in calculating amounts previously excluded is focus of examinations.

  • Amounts contributed pursuant to a one-time irrevocable election at initial eligibility to participate, or at other times to be specified in regulations, are treated as nonelective contributions, not subject to the $10,000 limit or to discrimination testing.