Clients Must Be Proactive on Eligibility to Sponsor 403(b) Plan

The Internal Revenue Service (IRS) Employee Plans Compliance Unit conducted a project related to 403(b) plan sponsorship eligibility for organizations that lost their 501(c)(3) exempt status due to the automatic revocation for not filing a required return for three consecutive years.

Some entities were unaware that their 501(c) status affected their eligibility to sponsor a 403(b) plan.

Generally, all entities exempt from federal income tax under Internal Revenue Code Section 501(a) are required to file an annual return reporting their operations and activities under Internal Revenue Code (IRC) Section 6033. Exempt entities must file an annual notice with the IRS using a Form 990 series return (IRC Section 6033(j) as added by the Pension Protection Act of 2006). The exempt status of entities that don’t file a required return or notice for three consecutive years is automatically revoked.

The Internal Revenue Service issued a reminder for tax-exempt organizations that many have a filing deadline for Form 990-series information returns in mid-May. Form 990-series information returns and notices are due on the 15th day of the fifth month after an organization’s tax year ends. Many organizations use the calendar year as their tax year, making Thursday, May 15, the deadline for them to file for 2014.

The Pension Protection Act of 2006 mandates that most tax-exempt organizations file annual Form 990-series informational returns or notices with the IRS. The law, which went into effect at the beginning of 2007, also imposed a new annual filing requirement on small organizations. Churches and church-related organizations are not required to file annual reports.

Small tax-exempt organizations with average annual receipts of $50,000 or less may file an electronic notice called a Form 990-N (e-Postcard), which asks organizations for a few basic pieces of information. Tax-exempt organizations with average annual receipts above $50,000 must file a Form 990 or 990-EZ depending on their receipts and assets. Private foundations file a Form 990-PF.

Organizations that need additional time to file a Form 990, 990-EZ or 990-PF may obtain an extension. No extension is available for filing the Form 990-N (e-Postcard).

The IRS offers an online search tool, Exempt Organizations Select Check, to help users more easily find key information about the federal tax status and filings of certain tax-exempt organizations, including whether organizations have had their federal tax exemptions automatically revoked.

If a plan sponsor received a CP120A Notice, its organization’s tax-exempt status has been revoked for failure to file a Form 990 series return for three consecutive years. The organization may be able to apply to have its exemption reinstated by completing Form 1023 or Form 1023-EZ. It must file an application for reinstatement even if it wasn’t originally required to complete one for tax-exempt status. To continue to maintain 403(b) eligibility sponsorship, the organization should request a retroactive reinstatement.

Tax-exempt employers that may sponsor a 403(b) plan are:

• Tax-exempt organizations established under IRC Section 501(c)(3);
• Public school systems;
• Cooperative hospital service organizations;
• Uniformed Services University of the Health Sciences Civilian faculty and staff;
• Public school systems organized by Indian tribal governments;
• Certain ministers employed by a 501(c)(3) organization, self-employed or not employed by a 501(c)(3) organization, but functioning as a minister in their daily responsibilities with their employer, such as a hospital chaplain.

The IRS notes that an organization may meet more than one of the these criteria, so even if it loses its 501(c)(3) status, it may still be eligible to sponsor its 403(b) plan under another category.

More information is here.