Art of the Qualified Plan Audit

In Summary New IRS Guidance for IBO Flexibility: IRS Notice 2024-77 provides flexibility for inadvertent benefit overpayments (IBOs) from retirement plans. It confirms that employers are permitted, but not required, to seek recoupment of funds paid to a participant by mistake. Choosing Not to Recoup Preserves Rollover Status: If a plan sponsor forgives the overpayment, the … Continued

  The Internal Revenue Service has announced adjustments on the limitations affecting retirement plans. In particular, participants can now elect to defer up to $23,500 to 401(k), 403(b), and 457(b) Plans in 2025 compared to $23,000 in 2024. Below is a chart that outlines updated employee benefit plan limits: PLAN LIMITS RETIREMENT & SOCIAL SECURITY … Continued

In Summary 403(b) Plan Eligibility: Only specific 501(c)(3) organizations and public education institutions are permitted to sponsor a 403(b) plan. An auditor must verify this tax-exempt status using tools like the IRS’s TEOS and must also obtain and review the executed plan document, adoption agreement, and all amendments to ensure the plan satisfies IRS requirements in … Continued

How Does the 403(b) Special 15-Year Catch-Up Contribution Work? Where have you worked, for how long, and how much have you contributed to the 403(b) plan? These are all questions that make up the puzzle pieces necessary to compute each participant’s available 403(b) catch-up. Participants in a 403(b) plan can make an additional contribution once … Continued

In Summary Understanding the True-Up: A true-up provision ensures employees receive the maximum potential employer match by looking at their total annual contributions against their total annual compensation. This contrasts with a per-paycheck match, which only looks at the contribution made from that specific paycheck. This feature is essential for employees who “front-load” their retirement … Continued

In Summary When Good Intentions Go Wrong: Employers who commit operational errors by authorizing 401(k) hardship distributions that were not permitted by the plan document’s provisions can utilize the IRS’s Employee Plan Compliance Resolution System (EPCRS) to resolve these compliance failures. Retroactive Amendments: When the unauthorized distributions could have been allowed under IRS rules (e.g., non-safe-harbor … Continued

In Summary A Warning Against Employer Discretion: “Bleeding-heart” plan sponsors are advised against approving non-safe harbor hardship distributions (like paying for weddings or maxed-out credit cards) on a case-by-case basis, as this discretionary approach risks discriminatory application and potential IRS penalties. The Plan Document Must Dictate Approvals: To remain compliant, any approved hardship reasons—especially non-safe … Continued

In Summary Defining Catch-Up Contributions Correctly: Catch-up contributions are specific amounts (e.g., $7,500 in 2024) that participants aged 50 and over can contribute only after they have first exceeded the standard elective deferral limit (e.g., $23,000 in 2024), a plan-imposed limit, or the ADP test limit. The Problem with Pro-Rata Payroll Coding: A common error … Continued

In Summary Keep in Mind: 403(b) eligibility and contribution rules (universal availability, OIAI, LTPT, post-severance contributions, ACP/ADP mechanics, and annual limits) determine who may defer and how much they — or the employer — can contribute. Auditors must verify the sponsoring organization’s tax-exempt status and obtain a valid, executed 403(b) plan document, including all necessary … Continued

In Summary SECURE 2.0 Expands Coverage: The SECURE 2.0 Act’s Long-Term Part-Time (LTPT) rules, effective for 403(b) plans as of January 1, 2023, require employers to permit employees to make elective deferrals if they work 500-999 hours annually for two consecutive years (starting with the 2023 plan year) and have reached age 21. Impact on … Continued