The Internal Revenue Code of 1986 (the Code), permits governmental and tax-exempt entities to sponsor tax-advantaged retirement plans meeting the Code Section 457(b). Although governmental Section 457(b) Plans primarily operate and act like Code Section 401(k) plans and Code Section 403(b) Plans (i.e., a “qualified” retirement plan). Section 457(b) plans maintained by tax-exempt entities must be “top-hat” plans, thereby limiting participation to a select group of highly-compensated individuals and management employees. Numerous non-profits sponsor Section 457(b) Plans as a means of providing additional nonqualified deferral opportunities for their highly-compensated executives. The Internal Revenue Service (IRS) has decided to take a closer look at these arrangements, announcing recently that it would begin conducting “compliance checks” of Section 457(b) Plans maintained by non-governmental entities (e.g., health systems, educational institutions, museums, etc.). Though the compliance checks are not full audits, plan sponsors can expect the IRS to request extensive information regarding written and operational plan compliance.
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