Last month the IRS issued Revenue Procedure 2013-22 to create a long-awaited plan document compliance program for Section 403(b) plans. The program is another step in a series of efforts by the IRS to bring 403(b) plans into a compliance regime similar to what has been in place for many years for Section 401(a) tax-qualified retirement plans. The program will allow an eligible employer to adopt a pre-approved plan document and have reliance that the plan complies in form with applicable requirements for 403(b) plans. Eligible employers include Section 501(c)(3) tax-exempt organizations, public schools and other state and local governmental entities, churches and certain church-controlled organizations. There will be trade-offs for having that reliance, such as a general inability to modify the plan’s terms and the inability to use certain plan design features. This lack of flexibility may cause some eligible employers to conclude that their best option is to maintain an individually-designed plan.
The IRS will accept two types of 403(b) plans for approval under the program, (i) prototype plans and (ii) volume-submitter plans. In each case, the plan sponsor that develops and creates the document (such as eligible recordkeepers, investment providers and other vendors) will submit it to the IRS requesting approval of the form of the document. The IRS will issue an opinion letter on the form of a prototype plan and an advisory letter on a volume-submitter plan. An employer adopting a pre-approved plan will be able to rely on the IRS opinion or advisory letter for the plan as evidence that the form of the plan is tax-compliant. In order to have this reliance, the employer generally must have selected only those design options that are specifically permitted under the plan document.
A prototype plan will contain two components — a basic plan document and an adoption agreement. Employers will be able to select various options under the adoption agreement but will not be permitted to otherwise modify the adoption agreement. Additionally, there will be two types of prototype documents for employers to consider. “Standardized” prototype plans will offer only options that will ensure that the plan meets minimum coverage and nondiscrimination requirements as a matter of plan design. “Nonstandardized” prototypes will provide more design options with regard to eligibility conditions and contribution formulas, continuing to ensure that the terms of the document meet applicable tax requirements, but employers will be required to independently confirm that the plan in operation complies with minimum coverage and nondiscrimination requirements.
Volume-submitter plans will provide employers with somewhat more flexibility than prototype plans and will be based on a sample, or specimen, document that the IRS has approved. Alternatively, a specimen adoption agreement and basic plan document can be submitted for approval.
The IRS will require that pre-approved 403(b) plan documents incorporate by reference the terms of applicable investment arrangements into the plan document and include provisions stating that the pre-approved plan document language controls in the event of a conflict between its provisions and the provisions of the plan’s investment arrangements.
The IRS had originally indicated that it was considering implementing both a pre-approved plan program and a determination letter program for individually-designed 403(b) plans. The IRS has now announced that, due to limited resources, it has determined that it is not feasible to implement a determination letter program at this time. As a result, in general, eligible employers adopting 403(b) plans for their employees will be able to rely on the acceptability of the form of the plan document only if it has been pre-approved under Revenue Procedure 2013-22. However, public schools that have adopted the model plan language in Revenue Procedure 2007-71 will be entitled to reliance under that revenue procedure, absent further notice from the IRS.
Availability of Pre-Approved Plans
The IRS will begin accepting applications from pre-approved plan providers this summer. The IRS has not announced when it will begin issuing opinion and advisory letters on the form documents submitted. However, it is expected that this process may take a year or more. As a result, eligible employers will likely need to wait some time before formally recognized pre-approved plans become available.
The opportunity to adopt a 403(b) plan document that has been pre-approved as tax-compliant likely will be a significant attraction for many eligible employers. However, employers should be aware of the limitations and conditions associated with pre-approved plan documents, and should consider with their advisers whether an individually-designed plan would better meet their needs. Examples of situations in which an individually-designed 403(b) plan may be more appropriate include plans with different contribution formulas for different segments of the employer’s workforce and plans with other unique design or administrative features.