IRS focus on 403(b) plans; “universal availability” | KPMG | GLOBAL

IRS focus on 403(b) plans; “universal availability” requirement

IRS focus on 403(b) plans; “universal availability”

An IRS official said during a recent IRS webinar that the “universal availability” requirement of section 403(b) plans is a focus of 403(b) plan audits. In fact, tax professionals have noticed that sections 403(b) and 457 plan examinations by the IRS have increased in the last few years.


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A section 403(b) plan is a type of employee retirement plan available to governmental employers, tax-exempt agencies, or self-employed ministers. In a 403(b) plan—as long as certain requirements are met—employee pre-tax and employer contributions to the plan are not treated as current compensation for employees. Instead, employees are taxed on distributions from the plan. 

One requirement for satisfying section 403(b) is the “universal availability” requirement—i.e., if one employee is able to make elective contributions to the plan, all other employees of the employer must also have an option to make elective contributions to the plan (unless these employees fall under a permitted statutory exclusion such as they are participants in another eligible type of deferred compensation plan; they are employees who work less than 20 hours per week; they are non-resident aliens; or they are students providing services pursuant to section 3121(b)(10)).  

Exclusions, plan failure

Some entities are still using exclusions that were provided by a 1989 revenue procedure, but subsequently issued regulations (2007) clarify that most of these exclusions can no longer be used. Also, some entities do not invite "lower level" employees into the plan—this is not permitted; instead, the right to make elective pre-tax contributions must be made available to almost every employee.

Failing to provide universal availability can cause the arrangement to “fail” section 403(b) eligibility, which could mean treating all of the elective contributions to the plan as taxable compensation.

However, there is a specific correction for a universal availability failure in a section 403(b) plan through the IRS’s Employee Plans Compliance Resolution System (EPCRS) program. EPCRS provides a method to remedy compliance issues with respect to employee retirement plans and therefore to avoid total plan disqualification.

If the IRS finds such an error on examination, the IRS may allow a correction under the “Audit Closing Agreement Program” (also part of EPCRS), but typically only after the employer agrees to pay a noticeable sanction penalty for failing to run the plan correctly.


For more information, contact the Managing Director-in-Charge of KPMG's Washington National Tax Exempt Organizations Tax group:

D. Greg Goller | +1 (703) 286-8391 |

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