Albert Einstein theorized that because time is relative, a space traveler who leaves earth and travels near the speed of light will return to earth having aged more slowly than the people she left behind. For the space traveler, time has slowed down relative to the passage of time on earth. But those of us who are earthbound must deal with time moving as quickly as ever. And that is why we now find ourselves with only a year left in the remedial amendment period (“RAP”) that the IRS has provided to 403(b) plans. If a plan sponsor wants to take advantage of the RAP, it must complete the requirements of the RAP before March 31, 2020.
First, some background. Those who have worked with 403(b) plans since before 2009 will remember that prior to the IRS regulations that were effective in that year, the Internal Revenue Code (“IRC”) did not require that a 403(b) plan be maintained in accordance with a written document. ERISA covered 403(b) plans were subject to the ERISA document requirements, but the IRC did not require it. To continue with the space-time theme, the 2009 regulations were something like the big bang, creating a new universe for 403(b) plans. One of the changes was the requirement that a contract (or custodial account) would not qualify under IRC section 403(b) unless it was maintained pursuant to a “written defined contribution plan”. The regulations require that the written plan “contain all the material terms and conditions for eligibility, benefits, applicable limitations, and the time and form under which benefit distributions would be made”.
However, (in contrast to the parallel 401(k) universe) the IRS neither provided for a determination letter program for 403(b) plans or for pre-approved prototype or volume submitter plans. It provided some limited guidance as to what it expected in a 403(b) plan, but mostly document providers were on their own. This started to change in 2013, when the IRS announced procedures for the issuance of pre-approved 403(b) plans (Rev. Proc. 2013-22). Once the program was opened up, document vendors (which included many of the major investment companies serving the 403(b) market), submitted documents to the IRS for approval. The IRS reviewed the documents and issued opinion or advisory letters when they were approved beginning in March of 2017. Employers that adopted the approved plans could rely on the letter that the form of the document that they adopted to a substantial extent satisfied the form requirements of 403(b).
In addition, in connection with the introduction of pre-approved 403(b) plans, the IRS announced a remedial amendment period. The RAP allows an eligible employer to retroactively correct defects in the form of a written 403(b) plan by timely adopting a pre-approved plan or by otherwise timely amending its plan document. The document may be retroactively adopted to the first day of the RAP period to obtain retroactive relief to that date. The first day of the RAP is January 1, 2010, and the last day is March 31, 2020. Therefore, if a plan completes the adoption of a pre-approved document by March 31, 2020, and is retroactively adopted to January 1, 2010 (or, if later, the date the plan was initially adopted) any defects in the form of the plan will be deemed corrected for all years after 2009. The RAP requirements can also be met by a sponsor making corrections to its current document, but the sponsor only has reliance from the IRS that the document meets the requirements of 403(b) if it adopts a pre-approved document. Note that the RAP cannot be used to correct operational errors, but can correct a plan provision, or the absence of a provision, that causes a plan to fail to meet the requirements of 403(b).
If it hasn’t done so already, should a sponsor restate its plan onto a new, pre-approved document? To be clear, restating the document is not a requirement. A sponsor is free to maintain its current document if it chooses. But there are some compelling advantages to restating the plan, especially before the March 31, 2020 deadline. In addition to the ability to rely on the approval letter and the retroactive effective date, another plus is that the sponsor of the pre-approved document is responsible for keeping it up to date if there are changes in applicable laws or regulations that require plan amendments.
On the other hand, there is some amount of work involved to make sure that the restatement is correct. And there may be some plan designs that do not easily fit onto the pre-approved format. But in our view, the benefits substantially outweigh the costs, and unless the plan design precludes the use of the pre-approved document, we suggest that sponsors seriously consider restating using a pre-approved document before the March 2020 deadline
The process of restating the current plan to a new pre-approved document will take some time, but in most cases, it is not overly burdensome. Based on our experience working with the documents so far, here are some suggestions to plan sponsors to help smooth the process and get the most out of it:
- Start early. It may be a little late in the game to give this advice but you should at least begin the process as soon as you can in 2019. It seems likely that the plan document sponsors will start to experience a rush as we get closer to the end of 2019 and it is important to make it into the queue before document sponsors start closing the door. Beginning the process often means simply contacting your investment provider and asking for a document to be prepared.
- Gather all prior plan documents and amendments. If your plan is taking advantage of the RAP and retroactively adopting the plan, you will need to incorporate all of the changes in the plan’s design since 2010. Be sure to also gather documents that were sent to participants about the terms of the plan, such as a summary plan description, summary of material modifications, enrollment kits or forms. It is important that the retroactive document reflect the promises made to participants during the remedial amendment period unless not permitted.
- Use the restatement process as an opportunity to re-consider aspects of your plan design. Are there any issues in the plan’s operation that you want to address? Are you satisfied that the design accomplishes your objectives?
- Use the restatement process as an opportunity to conduct a compliance review. Is the plan being operated in accordance with the terms of the document? You may need to fix operational errors, and in any event, you don’t want to carry mistakes over to the new document.
- Ask for help from your service providers and advisors. The pre-approved documents are meant to cover a wide variety of plan designs and situations and so can be quite complicated and some sections of the adoption agreements can be challenging to complete.
- Start early. We know – we already said that. But unless you have a space ship capable at traveling at the speed of light, the deadline is drawing near.