Clues a Form W-2 provides about a 403(b) Plan

Written by Linda Segal Blinn

When the Internal Revenue Service (IRS) audits a 403(b) plan, the pre-contact analysis includes a review of the Form W-2 (Wage and Tax Statement) for the year of the audit. An IRS auditor may be able to “identify potentially significant issues” with a 403(b) plan by analyzing the Form W-2.

• Proper reporting of employee deferrals and non-salary reduction contributions is indicative of the employer’s internal controls.

Only contributions that are pre-tax deferrals and (if permitted under the 403(b) plan) Roth 403(b) contributions should be reported in Box 12 of the Form W-2.

Any other contributions — for example, employer contributions or mandatory employee contributions under a governmental plan — are not reported in Box 12. An employer may, but is not required to, report those contributions in Box 14 (Other) of the Form W-2.

When auditing a 403(b) plan, the IRS auditor may request a sampling of W-2s to verify that only elective deferrals have been reported in Box 12. The W-2s also enable an IRS examiner to assess whether an employer’s payroll system contribution reporting aligns with the human resources records. If there is a discrepancy, an IRS auditor may follow up to obtain an explanation.

• Proper reporting of employee deferrals indicates whether a participant has exceeded the annual IRS elective deferral limit.

The amount of elective deferrals reported in Box 12 of the Form W-2 may indicate 403(b) plan design — namely, whether the 403(b) plan permits the age-based catch-up and/or (if applicable) the 15 Years of Service catch-up. If either of these catch-ups is permitted, there should be a provision describing the feature in the written 403(b) plan.

An employer is also responsible for ensuring that a participant’s elective deferrals to the 403(b) plan do not exceed the annual IRS limit (factoring in any available catch-ups). An IRS examiner will review Box 12 of the W-2 to determine if a participant’s contributions are in excess of the IRS annual deferral limit.

Best practices for 403(b) plan sponsors

• Maintain internal protocols for the payroll department (and payroll provider, if applicable) to ensure data integrity.
• Compare human resources participant records (including employee data of birth, eligibility for catch-ups, etc.) with payroll data reflecting a participant’s annual deferrals to the 403(b) plan.

If you have questions or would like assistance, reach out to your Voya Relationship Manager.

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Resources:

• “General Instructions for Forms W-2 and W-3”
• IRS webpage “Policies, Procedures and Internal Controls Self-Audits”

Linda Segal Blinn is Assistant Vice President of Voya’s Technical Services for the Tax Exempt Markets. In that capacity, Linda supervises the provision of legislative, regulatory and compliance information to governmental and nonprofit employers to assist them in operating their retirement plans. Linda’s expertise includes administering and designing defined contribution plans in conformance with the Internal Revenue code and ERISA.A frequent author and speaker on regulations governing defined contribution retirement plans, Linda is a member of the 403(b) Retirement Plan council of the Association of School Business Officials International, and the National Tax-deferred Savings Association (NTSA)’s Professional Education Committee and is a contributing author of the 403(b) Answer Book.