IRS Initiates Compliance Check of 457(b) Top Hat Plans

Earlier this year, the Internal Revenue Service (IRS) announced that its Employee Plans Compliance Unit (EPCU) would begin a compliance check of certain 457(b) plans maintained by non-governmental, tax-exempt entities. These plans, commonly referred to as “Top Hat” plans, are frequently offered by tax-exempt organizations in addition to other qualified retirement plans.

The good news is that the extent of the compliance check is fairly limited. Letters and a questionnaire will be sent to 200 tax-exempt organizations in fiscal year 2013, and another 200 will be sent in fiscal year 2014. Employers will be selected for review based on information contained on 2011 Form W-2 and Form 990.

If you receive a compliance check letter from the IRS, it is important that you respond in a timely fashion (15 days from the date of the letter) and provide the requested information. Although responding to the questionnaire is voluntary, failure to do so may result in the IRS initiating an audit of your plan and/or organization. In those instances where answers to the questionnaire indicate the plan is not being operated in accordance with the Internal Revenue Code (IRC), the IRS will notify the plan sponsor of the corrective actions to be taken, including a possible audit.

Although your chances of receiving a compliance check letter are fairly small, all employers who sponsor a Top Hat plan would benefit from reviewing their plans to ensure they are being operated in accordance with the IRC. This chart highlights some points to examine to make sure your plan is compliant.

If you have any questions about your organization’s 457(b) Top Hat plan or would like to speak with an advisor about reviewing or establishing a plan, please contact us at (855) 882-9177 or via e-mail at sbs@hanys.org.