403(b) PLAN COMPLIANCE & IRS AUDITS

Matthew Josten, RVP TSA Consulting Group, Inc Matthew Josten, RVP TSA Consulting Group, Inc. 888-777-5827 mjosten@tsacg.com

403(b) HISTORY PRE 2009: “WILD WEST” ERA 1958 – IRC Section 403(b) for 501(c)(3) organizations (Annuities only) 1961 – Added Public Education Institutions 1974 – Passage of ERISA added mutual funds No Plan Document or Information Sharing Self-Certification by employees Life insurance policies Transfers to unauthorized Investment Providers

403(b) HISTORY POST 2009: THE PARTY’S OVER 403(b) Final Regulations issued in 2007, went into effect in 2009: Plan Document & Plan-level recordkeeping Investment Provider Information Sharing Requirements Limiting Transfers to Providers that have agreed to share information with Plan Sponsor Formal Correction Procedures Expanded IRS Examinations Emergence of Third Party Administrators (TPAs)

EMPLOYER RESPONSIBILITIES WRITTEN PLAN DOCUMENT Must have a Plan Document that specifies all of your Plan’s terms and conditions Plans with multiple investment providers are expected to adopt a single plan to coordinate administration among the providers Must keep document up to date HEART & WRERA amendments (2012) Must maintain a list of authorized investment providers New: IRS Pre-Approved Plans (Prototype and VS) Adopting before end of Remedial Amendment Period (3/31/20) can retroactively correct form defects

EMPLOYER RESPONSIBILITIES Plan Administrator AXA American Century Fidelity Horace Mann VALIC Voya Employer PLAN LEVEL RECORDKEEPING Aggregate data from all investment providers Why is this important? Participant Data From Providers Demographic/Payroll Data From Employer

EMPLOYER RESPONSIBILITIES UNIVERSAL AVAILABILITY/MEANINGFUL NOTICE In general, if you allow one employee to make 403(b) elective deferral contributions, then you must allow all employees Limited Exceptions: Nonresident Aliens, Student Employees Part-time Employees who normally work fewer than 20 hrs./week (1,000/yr.) Are you tracking actual hours worked? Do you have procedures in place to notify employees who go over? You must notify employees annually of their ability to participate

EMPLOYER RESPONSIBILITIES MAC LIMITS AND TRANSACTION APPROVALS Monitor annual contribution limits Ensure accurate processing/recordkeeping of plan transactions: Loans, Hardships, Distributions, Rollovers, Transfers, QDROs, etc.) TIMING OF REMITTANCE As soon as administratively feasible No later than the 15th business day of the month following the month in which the amount was withheld

403(b) PLAN AUDITS NATIONAL IRS AUDIT FACTS IRS audits are a product of the new regulations in 2009 Audit activity has been increasing since 2011 Several releases from the IRS state that audit activity will continue to increase Our firm has been involved in over 50 public education 403(b)/457(b) audits nationally since 2011 Current years under examination 2015-16

403(b) PLAN AUDITS AUDIT TRIGGERS Random Low participation rate W-2 Forms show excess contributions or corrections of excess contributions Employee complaint

403(b) PLAN AUDITS HOW DO 403(b) AUDITS WORK? What types of plans will they audit? How will they notify employers? What exactly is the IRS looking for? Are you, the employer, ready to answer their questions? What alternatives do I have to ensure compliance?

403(b) PLAN AUDITS WHAT TYPES OF PLANS? Most audits originate with the 403(b)/457(b) Typical Audit will also ask for any other retirement plans offered by the employer: 401(a), 457(f), Bonus/Incentive Plans, etc. Many audits ask for review on employment contracts for all types of employees: Superintendent, Board Members, Executive Staff, etc.

403(b) PLAN AUDITS HOW WILL I KNOW? Notification by letter – regular mail Problem: Sent to whom? Unrelated department? Solution: Notify all of possibility in order to ensure proper response Notification letter is followed by multiple INFORMATION DOCUMENT REQUESTS (IDRs) Time limit for response – usually three weeks Working with TPA? Form 2848 must be submitted

403(b) PLAN AUDITS WHAT ARE THEY LOOKING FOR? Plan Documents for ALL Plans – Up to date? Eligibility and Participation – Who is eligible? Who is participating? Evidence of delivery of employee communications regarding Eligibility and Enrollment Contributions that appear to exceed limits Loan calculations Hardship Withdrawals (supporting documents, suspension of contributions, copies of 1099s, etc.)

403(b) PLAN AUDITS WHAT ARE THEY LOOKING FOR? Copies/reports of 1099s issued for distributions in the year of audit Remittance files by each payroll Do remittances match the Salary Reduction Agreement (SRA) on file for each payroll period? Contribution deposit files from providers Do the deposits match remittance files? Are they timely?

403(b) PLAN AUDITS WHAT ARE THEY LOOKING FOR? Vendor Agreements for the sharing of information (ISAs) Completion of an employer questionnaire Entity background, system procedures, plan administration, etc. Policies and procedures (HR, Benefits, Payroll, etc.) Staff interviews – new employee orientation, materials given to Subs, etc.

403(b) PLAN AUDITS ARE YOU READY FOR AN AUDIT? Do you have the home office contacts for your vendors’ compliance departments? Do you have copies of plan transactions and the supporting documentation?

403(b) PLAN AUDITS ARE YOU READY FOR AN AUDIT? Do you have copies of loan calculations? Account balance at time of loan Previous loan balances Confirmation of no defaulted loans Do you have data from vendors? If no data, do you have a documented log of every call made to verify that transactions were acceptable and compliant?

IRS CORRECTION PROGRAMS SELF CORRECTION PROGRAM (SCP) Used to correct insignificant operational errors Eligible operational errors include: Failure to follow the written terms of the plan Excluding eligible participants Loan failures No notification to the IRS and no fee Must be done timely (typically before the end of the second plan year after the failure occurred)

IRS CORRECTION PROGRAMS VOLUNTARY CORRECTION PROGRAM (VCP) Used to correct egregious mistakes with plan document or plan operation $1,500 for plans with assets of $500k or less $3,000 for plans with assets of over $500k to $10M $3,500 for plans with assets of over $10M

PLAN ADMINISTRATION OPTIONS Self Administration Local Firm Vendor (data aggregator) Third Party Administrator – Vendor or Independent

Questions Thank you