For anyone who may have missed today's BNA Daily Tax Report, it reports that Employee Plans agents in each of the four regions will begin initiating "on their own" (i.e., not at the request of the Exempt Organizations Division) audits of section 403(B) plans. In particular, Assistant Commissioner for Employee Plans and Exempt Organizations Evelyn Petschek's fiscal 1999 EP/EO Program Letter directs each region to examine "at least five" public school 403(B) arrangements within their jurisdiction. This information came from IRS Employee Plans Senior Tax Law Special Robert Architect, and was announced at the American Society of Pension Actuaries' annual meeting in Washington, D.C.

Mr. Architect indicates that these audits have already begun. Has anyone on this board experienced one? What questions are being examined? How tough are the auditing agents being?

[Note: This message was edited by CVCalhoun]

I haven't seen an audit of a public school's 403(B) - although I have performed my own review of a school's 403(B) arrangement and worked with outside counsel to submit to the TVC program to correct.

However, I am in the process of having a client's 403(B) plan (non-school) audited by IRS. IRS is being reasonable, but the main reason is due to our prior compliance review and cooperation in this 1 1/2 year long audit. In addition, I consider our significant efforts to correct as being one of the major reasons we are be treated so fairly. They have examined every aspect of the plan, but are most interested in the various plan and statutory limits. As with most other audits, participant loans are a popular review item.

I think the general message is plan sponsors (including school districts) better take action (and soon)! The EP agents are trained, and ready to go.

IRS audits of the 403(B) plans offered in public schools have occurred in several states - Minnesota, Iowa, Ohio, and Illinois. Most common violation reported by the IRS has been contributions which exceed the eligible exclusion allowance/415/402(g) limits. Public School employers have been required to pay under with held taxes for those excesses. Second most common violation recently reported was violation of IRC403(B)(12)(A)ii where the elective deferral plan was not made available to virtually all employees. Most commonly, substitute teachers who normally worked more than 20 hours per week were being excluded!

You raise a good point on the substitute teachers. It has been our experience that casual workers who nevertheless work more than 20 hours a week are a big issue for 403(B) plans. This would include substitute teachers, substitute bus drivers, medical interns, etc.