Red Flags Regarding Contribution Amounts and Limits

Red Flags Regarding Contribution Amounts and Limits

About TDS Founded 1978 Largest independent Plan Administrator in California Citrus Heights, Newport Beach Providing plan administration to public schools for over 20 years Currently servicing nearly 30% of California public school employers Member: 403(b) Coalition, Industry Associations Only TPA recommended by CSBA 2

Who will be audited? IRS Press Release: http://www.irs.gov/newsroom/articl e/0,,id=171528,00.html Questionnaire Source: http://www.irs.gov/pub/irstege/letter1562_epcu.pdf#page=2 3

Top Reasons 403(b) Plans Fail Audits 1. Failure to properly apply universal availability to participants. 2. Failure to properly track and limit 15 year rule contributions and combine with age 50 Catch-up Feature. Source: http://www.irs.gov/retirement/article/0,,id=206498,00.html 4

CSBA 5-Part Webinar Series How to Survive an Audit of Your 403(b) Plan Part I. How to Survive an Audit of Your 403(b) Plan Part II Three Common Universal Availability Errors and How to Fix Them. Plan Participation Why should you care? Because the IRS does. Red Flags regarding contribution amounts and limits. 5

CSBA Webinar Series Review Part I Surviving a 403(b) Audit Universal Availability Contribution Limits Loans Part IV Plan Participation Why its important to the IRS 6 easy ways to increase participation Part II Surviving a 403(b) Audit Hardships Early Retirement Incentives Timeliness of Contributions Part III Universal Availability How to make the notice Meaningful Eligible Employees per the IRS 6

CSBA Webinar Series Part V Red Flags Regarding Contribution. Amounts & Limits. This has appeared in 100% of the 403(b) audits. 7

Red Flag #1 Coding Mistakes Source for correct codes for box 12: http://www.irs.gov/pub/irs-pdf/fw2.pdf 8

Red Flag #1 Coding Mistakes Something to double-check: After the webinar, make sure you have proper codes in box 12 of all W-2 Forms: Code E for 403(b) contributions Code G for 457(b) contributions Code BB for Roth 403(b) contributions Code EE for Roth 457(b) contributions Source for correct codes for box 12: http://www.irs.gov/pub/irs-pdf/fw2.pdf 9

Red Flag #2 SRA is not clear Traditional & Roth An unclear SRA could mean potential contribution errors. For example: Taking money out pre-tax and putting it in a post-tax account Taking money out post-tax and putting it in a pre-tax account 10

Red Flag #2 SRA is not clear Traditional & Roth Solution: Make sure your SRA is clear 11

Red Flag #3 402(g)7 and Age 50 - Which comes first? The IRS is interested in contributions over the normal maximum New Annual Contribution equals $17,000 for 2012 12

Red Flag #3 402(g)7 and Age 50 - Which comes first? 402(g)7 If an employee has 15 or more years of full time service with their employer, that employee can contribute an extra $3,000 per year not to exceed $15,000 over their lifetime. 13

Red Flag #3 402(g)7 and Age 50 - Which comes first? If an employee is 50 or over, they can contribute an additional $5,500 per year. 14

Red Flag #3 402(g)7 and Age 50 - Which comes first? Annual limit for 2012: $17,000 402(g) annual limit: $3,000 ($15,000 lifetime) Age 50 annual limit: $5,500 Max for 2012: $25,500 15

Red Flag #3 402(g)7 and Age 50 - Which comes first? The IRS is interested in the order in which the excessive contributions have been used. 402(g)7 first - then over 50 16

Red Flag #3 402(g)7 and Age 50 - Which comes first? How John Smith & employer calculate 20 years of service, age 55 $17,000 annual $0 402(g)(7) $5,500 over 50 $22,500 total 17

Red Flag #3 402(g)7 and Age 50 - Which comes first? How the IRS calculates John Smith 20 years of service, age 55 $17,000 annual $3,000 402(g)7 $2,500 over 50 $22,500 total 18

Red Flag #3 402(g)7 and Age 50 - Which comes first? 402(g)7 worksheet Actual Audit Requests Verification of lifetime participation Arbitrary employee selection Copies of W-2 to match employers electronic payroll file Verification of contributions allowances birth date, hire date, re-hire date, termination date 19

Red Flag #4 Excess Contributions - Proof of 1099 Who issues the 1099 s for excess contributions? If your TPA does not, it creates an issue with your record keeping. 20

Red Flag #5 Plan Aggregation It s common to have multiple plans Two + 403(b) Plans Two + 457(b) Plans Who is keeping track of the contributions, loans and hardships? 21

Red Flag #6 All Qualified Plans are Aggregated Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit. 22

Red Flag #6 All Qualified Plans are Aggregated Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit. Solution: SRA should include language that lets the employer know if the employee is contributing to other qualified plans. 23

Receive A Free Copy of our Report, The 403(b) Audit Survival Guide Special Offer... At the conclusion of this webinar you will receive a link to a brief survey. Please take a few minutes to tell us what you thought of today s webinar. As a way of saying thank you, everyone who completes the survey today will receive our free report full of valuable information as well as a link to register for the next webinar. 24

IRS Resource 403(b) Plan Checklist http://www.irs.gov/pub/irs-tege/pub4546.pdf 25

The End? Nope... Watch for notifications from CSBA about upcoming webinars! 26