IRS Probes Nongovernmental 457(b) Plans

For 457(b) plan sponsors who receive an IRS questionnaire, recommendations on how to reply

By Mike Webb © Cammack LaRhette Consulting Sep 17, 2013

Editor’s note: There are two types of Section 457(b) defined-contribution retirement plans. Governmental 457(b) plans are limited to government employees, including state and local workers, police officers, firefighters and some teachers. Nongovernmental 457(b) plans, addressed below, are available only to “a select group of management or highly compensated employees” of tax-exempt nonprofit corporations such as hospitals, charitable groups and unions. Although the applicable regulations differ somewhat, both types of 457(b) plans allow employees to save at rates comparable with 401(k) plans.

Just when you thought the IRS might be taking a breather, you receive a letter asking questions about your Section 457(b) retirement plan. HR at nonprofit corporations may regard this plan as a blip on their radar screens, only recognizable since members of senior management participate in it. Now the IRS wants to know significant details regarding the various plan provisions. Could an audit be far behind? How should the questionnaire be handled?

Scope and Timing

The good news is that the IRS has sent, or plans to send, a total of only 400 letters to nongovernmental tax-exempt 457(b) plan sponsors, which represent a small fraction of the thousands of such plans in existence. Some plan sponsors have already received these letters; others will receive them before Sept. 30, 2014. Sponsors have just 15 days from the date of the letter to respond.

If a plan sponsor is unable to properly respond to the questions in such a short period, a request for extension should be made to the contact in the letter. Generally, the IRS has been flexible in such circumstances.

The Questions

The questionnaire—a sample is posted at IRS.govincludes 10 questions, ranging from straightforward (“Does your organization sponsor a 457(b) plan?”) to more complex, such as an inquiry regarding who is eligible for the plan. That query can be thorny, since the definition of a “select group of management or highly compensated employees” is far from crystal clear, and any mistake—as is the case with all 457(b) plan defects—is currently not eligible for correction under the Employee Plans Compliance Resolution System (EPCRS). However, the IRS has stated that corrections relating to IRC Section 457(b) will be accepted on a provisional basis outside of EPCRS, according to standards similar to those of EPCRS.

Other areas addressed in the questionnaire are:

  • The type of tax-exempt organization of the plan sponsor. For most, the answer is 501(c)(3).

  • Whether you are a state or local governmental unit. If you are, you likely received this questionnaire in error since it was only intended to be sent to nongovernmental 457 plan sponsors.

  • A list of other retirement plans that you sponsor.

  • Whether the plan permits loans. Your plan should not permit them since loans are prohibited in nongovernmental 457(b) plans.

  • Whether an age 50 catch-up deferral election is permitted. Your plan should not permit it since this election is prohibited in nongovernmental 457(b) plans.

  • Whether your plan allows for a special final-three-year 457(b) catch-up election. Most plans permit this election, although it is seldom used.

  • Whether the assets of the plan are available to the sponsor’s general creditors. They should be. Although governmental plan assets are required to be held in trust, the opposite applies to tax-exempt employers. Your plan assets should be available to general creditors, and not in a trust for the exclusive benefit of participants. Note that it is acceptable to hold assets in a “rabbi trust,” since rabbi trusts are accessible to creditors in the event of insolvency.

  • Whether the plan has filed a “top-hat” exemption notice with the Department of Labor. It should have done so, and you need to provide a copy of the notice with your questionnaire response.

  • Whether the plan has made any hardship distributions within the last three years. Likely not, since the hardship rules for such plans are much more restrictive than the rules that apply to 403(b) and 401(k) plans.


It is important to understand that the compliance questionnaire is not an audit, which would be far more comprehensive than a 10-item list. That said, the questionnaire should not be taken lightly; a failure to respond will most likely result in an audit, as will an inadequate response, or a response that indicates plan failures may be present.


If you sponsor a nongovernment 457(b) plan and have not received an IRS letter, now would be an appropriate time to review the plan with your consultants and appropriate benefits counsel to confirm compliance with applicable regulations, particularly with respect to those issues addressed in the questionnaire. If you have received a letter, you should work closely with benefits counsel familiar with such matters in responding to the questions and in addressing any potential compliance issues.

Mike Webb is vice president, retirement services, atCammack LaRhette Consulting. © 2013 Cammack LaRhette Consulting. Republished with permission.

Related SHRM Article:

Small Business Jobs Act Affects 401(k), 403(b), and 457(b) Plans, SHRM Online Benefits, September 2010

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SHRM OnlineRetirement Plans Resource Page

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