IRS Launches Universal Availability Rule Compliance Project

The IRS Employee Plans Compliance Unit (EPCU) has kicked off its long awaited compliance initiative focusing on how higher education organizations apply the “universal availability rule” to their 403(b) plans. As we’ve explained in a prior post, under the universal availability rule if a 403(b) plan permits any employee to make salary deferrals to the plan, then it must offer the same opportunity to all employees (with limited optional exclusions for certain classes of employees).

Last month the EPCU began sending compliance check letters to a national sample of over 300 colleges, universities, seminaries and other higher education organizations. These letters contain a detailed questionnaire and information on how to respond to the survey. Although this is strictly an information gathering exercise, higher education organizations that receive the survey shouldn’t think participation is optional. The IRS has said that an organization’s failure to respond to the contact letter by providing the requested information could result in further action or examination of the plan. (Indeed, the IRS is now conducting full-scope examinations of those plans whose sponsors failed to respond to last year’s 401(k) plan compliance check.)

Organizations that appear to comply with the universal availability rule will receive a closing letter from the IRS. Organizations that appear not to be complying can expect the EPCU to help them analyze the problem and make any necessary corrections. Note that organizations can self-correct compliance failures. Correction for a universal availability failure generally includes giving each excluded eligible employee the opportunity to participate. The organization must also make employer contributions to restore improperly excluded eligible employees’ lost opportunity to make salary deferrals. An organization’s failure to correct the error could result in the loss of favorable tax benefits for the plan and the employees.

403(b) plan administrators, regardless of whether they receive the compliance check letter, should consider using the compliance check as an internal audit tool to identify and correct any problems with universal availability. And if your organization is unfortunate enough to have received a compliance check letter, we strongly recommend that you respond. We are happy to assist in responding, correcting plan compliance problems, or performing an internal audit of your plan. You can learn more about the project on the IRS Web site.