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 50+ 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.

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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.

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Resources:

• “2023 General Instructions for Forms W-2 and W-3”: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf   
• IRS webpage “Policies, Procedures and Internal Controls Self-Audits”: https://www.irs.gov/retirement-plans/policies-procedures-and-internal-controls-self-audit