School Services of California, Inc.
Update

September 8, 1997
Copyright © 1997 by School Services of California, Inc.

IRS Looking at School Employers

The Internal Revenue Service (IRS) reportedly will begin a major initiative in 1998 focusing on whether state and local employers (including K-14 school agencies) are paying the appropriate Social Security taxes. According to Thomas Burger, Director of the IRS Office of Employment Tax Administration, the IRS for the past year has been conducting a massive outreach to state and local agencies about Social Security Act Section 218 compliance.

Mr. Burger has indicated that the examinations by the IRS will be limited to the most egregious cases, where IRS has made contact and been ignored.

Public school agencies have not been cited as a major problem area, however, they need to be aware of the pending audits by the IRS which could affect them.

TSA Issues

In May 1995, the IRS unveiled its compliance and correction program for tax sheltered annuities (TSA) after preliminary audits of a substantial number of TSAs revealed a substantial number of violations. In the first 70 plans audited, none were in total compliance with the law. An often cited reason for this significant number defects is the sheer confusion involved with having multiple vendors for TSA plans.

The Voluntary Correction Program (TVC) established by the IRS, provides a mechanism for employers to voluntarily correct past operational defects in TSAs that they've implemented on behalf of their employees. Under this program, TSA programs with operational defects will not lose their status as plans nor will employees lose the benefit of the exclusion allowance if the defects are corrected and if the employer pays a negotiated monetary sanction.

The TVS program has costs attached, and these costs are solely the responsibility of the employers. First, the employer must pay a correction fee with its submission, graded solely on the number of employees the employer has. Second, there is the cost of making corrections in the program itself to become fully compliant and, finally, once corrections have been agreed upon with the IRS, there is a sanction cost that must be negotiated. The sanction is capped at 40% of the total tax liability and it is reduced by the amount of the correction fee.

The IRS created the TVC operation to foster voluntary compliance by employers, and to get practitioners, providers and plan sponsors thinking about compliance. Initially scheduled to expire in 1996, it has now been continued into the foreseeable future. Only employers may apply for the TVC program. The TVC is certainly not an IRS audit but rather a voluntary opportunity for employers offering TSA plans to take timely steps to do the right job.

In December 1996, an IRS spokesperson announced plans to begin auditing TSA plans sponsored by public schools -- an activity that previously has been all but non-existent. Areas of specific audit risk include contributions limits, excludable employees and discrimination standards.

If no one has already done so, two steps by employers seem most likely to help bring a TSA plan into compliance away from the IRS spotlight: (1) self audit your plan now; and, (2) require insurance companies and vendors to meet standards to keep plans on track.

[Editors Note: Special thanks for assistance in developing this article to Public Alternative Retirement Systems (PARS) and Arthur Wexler of Metlife Resources. For additional information you may contact PARS at 1-800-540-6369 and Arthur Wexler at 1-800-354-9577.]

-- Arnold Bray
[Posted 9/8/97]