IRS focuses on 457(b), 403(b) plan catch-up contributions

Paycheck Protection Program changes become law

Catch-up contributions under Section 457(b) and 403(b) plans appear to be a new area of focus for IRS retirement plan audits. According to the Tax-Exempt and Government Entities (TE/GE) Division’s fiscal year 2020 program letter, the agency intends to examine both types of plans for excessive contributions and proper application of the catch-up rules. IRS recently released two new issue snapshots discussing these contributions. The snapshots explain the rules for the different types of catch-up contributions, review recordkeeping requirements and highlight compliance issues IRS will review during an audit.

457(b) catch-up contributions

Governmental and tax-exempt 457(b) savings plans can allow participants who did not defer the maximum amount in earlier years to make special catch-up contributions in the last three tax years ending before normal retirement age. Participants age 50 or older in governmental 457(b) plans — but not tax-exempt 457(b) plans — are also eligible to make regular catch-up contributions but cannot make both regular and special catch-up contributions in the same year.

The 457(b) snapshot indicates that auditors will review a long list of issues involving catch-up contributions. Key issues include whether plan documents include the necessary language authorizing the catch-up contributions, deferrals comply with the basic and catch-up annual limits, and participants in governmental plans haven’t made both types of catch-up contributions in the same year.

403(b) catch-up contributions

Like 401(k) and governmental 457(b) plans, 403(b) plans may allow participants age 50 or older to make regular catch-up contributions. In addition, certain 403(b) plans sponsored by “qualified organizations” may permit participants with 15 years of service to make special catch-up contributions. Both types of catch-up contributions are subject to an annual limit, but special catch-up contributions are also subject to a use test and a lifetime limit. When a plan allows both types of catch-up contributions, a coordination rule requires applying extra contributions to the special catch-up contribution before the age-50 catch-up.

The 403(b) snapshot notes that auditors will verify that plan documents authorize the catch-up contributions and plans offering both catch-up contributions correctly apply the ordering rules. IRS auditors will also check that the employer maintains the records necessary to calculate the contributions and has accurately calculated the contributions.

Ellen Stone
by Ellen Stone

Principal, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Principal, Mercer’s Law & Policy Group

Brian Kearney
by Brian Kearney

Principal, Mercer’s Law & Policy Group

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