Recently the Employee Plans Compliance Unit (EPCU) of the Internal Revenue Service completed an informal compliance check of 401(k) plans conducted via an extensive written questionnaire sent to plan sponsors. The results of the compliance checks are being used to refine the focus of plan examination efforts.

This week, the IRS announced that it is commencing a similar effort with respect to non-qualified deferred compensation plans for select groups of highly compensated employees, managers, directors and officers of tax-exempt organizations (“Top Hat Plans”) under Code Section 457(b). The project will consist of sending tax-exempt employers a compliance check letter requesting information about the plan or plans. Selected employers which had filed Forms W-2 for 2011 indicating contributions to a 457(b) plan and which also filed Form 990 will be receiving the questionnaire.

According to the IRS Employee Plans News June 24, 2013, http://www.irs.gov/Retirement-Plans/Employee-Plans-News, the goals of the compliance check are to verify that these Top Hat plans are complying with the Internal Revenue Code requirements (including annual dollar limits); identify issues of non-compliance and to develop recommendations for employers on how to avoid non-compliance. Specific issues of focus include: a) verifying the deferrals reported as 457(b) relate to an actual 457(b) plan; b) verify that the employer is eligible to sponsor a 457(b) plan; c) confirming that participation is limited to a select group of highly compensated employees, managers, directors or officers (the Plan is not allowed to be available to a broad group of employees); d) determining whether the plan includes features not permitted in Top Hat Plans sponsored by tax-exempts, but that are permitted for governmental 457(b) plans, including loans, age 50 catch-ups and Code Section 457(g) trusts; and e) reviewing unforeseeable emergency distributions.

The News Release indicates that identified plans which are out-of-compliance will be subject to audit or in some cases, referral to the Voluntary Correction Programs. The Employee Plans Compliance Unit expects to send questionnaires to 400 organizations over the next two fiscal years. Sponsors who receive such a questionnaire may want to work with their benefits counsel as they complete the form.