IRS to Focus on Retirement Plan Distributions and 403(b) Plan Rules in 2019

A Program Letter from the Tax Exempt & Government Entities (TE/GE) Business Operating Division of the IRS offers a heads up to what retirement plan sponsors can expect from the IRS in 2019.

Strategies approved for the Employee Plans (EP) division include:

• Distributions: verify that plans are following correct distribution processes and procedures and that participants are receiving correct distribution amounts;
• Form 5500, Annual Return/Report of Employee Benefit Plan, and Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, stop filers: contact employers sponsoring plans that did not file one or more required returns;
• IRC Section 403(b)/457 plans: examine 403(b) plans for universal availability, excessive contributions and proper use of catch-up contributions under IRC Section 414(v); and 457(b) plans for excessive contributions and proper use of the special three-year catch-up contribution rule;
• Small plans with large assets: determine whether smaller plans with trusts holding large assets have taken deductions on Form 1120, U.S. Corporation Income Tax Return, exceeding IRC Section 404 limitations;
• Simplified Employee Pension (SEP) plans: determine whether accounts violated maximum participant rules, failed to meet statutory and matched employer contribution requirements, and/or failed to meet IRC Section 416(i)(6) top-heavy requirements; and
• Terminated cash balance plans: examine terminated plans with cash balance features that may have exceeded IRC Section 415 limitations or generated a reversion which is subject to an excise tax.

Strategies approved specifically for tax-exempt organizations include:

• Previous for-profit: focus on organizations formerly operated as for-profit entities prior to their conversion to Internal Revenue Code (IRC) Section 501(c)(3) organizations;
• Self-dealing by private foundations: focus on organizations with loans to disqualified persons;
• Early retirement incentive plans: determine whether federal, state or local governmental entities that provide cash (and other) options to employees as an incentive for early retirement have applied proper tax treatment to these benefits; and
• Worker classification (misclassified workers): determine whether misclassified workers result in incorrectly treating employees as independent contractors.

“As more issues are developed and approved, those with a higher priority may potentially replace Compliance Strategies currently set forth in this document,” the Program Letter states.