403(b) retirement plans are similar to 401(k) plans, but the employers who may establish 403(b) plans are limited to public schools, certain tax exempt employers (including religious and charitable organizations) and certain ministers and employers of those ministers. 403(b) plans became subject to written plan document requirements similar to those applicable to 401(k) plans several years ago, but, unlike 401(k) plans, there was no IRS process in place to approve 403(b) plan documents. Recently, the IRS published procedures for issuing opinion and advisory letters for pre-approved 403(b) plans and updated its procedures for correcting operational and document failures in 403(b) plans.
In 2007, the Treasury Department issued final regulations requiring 403(b) plans to have a written plan document in 2009. The IRS provided model 403(b) plan language for use by public school employers in 2007. The IRS also allowed employers to delay adopting a written plan document until December 31, 2009 in IRS Notice 2009-3. If an employer adopted a written 403(b) plan document on or before December 31, 2009, the employer will have a remedial amendment period in which to correct plan defects retroactive to January 1, 2010 by timely adopting a pre-approved 403(b) plan or obtaining an individual determination letter. Refer to IRS Announcement 2009-89. The problem with Announcement 2009-89 was that the IRS had yet to issue procedures for issuing opinion or advisory letters to pre-approved 403(b) plans or issuing individual determination letters on 403(b) plans.
IRS Review of Pre-Approved 403(b) Plans
On March 28, 2013, the IRS issued Revenue Procedure 2013-22 which set forth the procedures for issuing opinion and advisory letters for 403(b) pre-approved prototype and volume submitter plans.
The IRS will accept applications for opinion and advisory letters regarding the acceptability of the form of the 403(b) prototype and volume submitter plans starting June 28, 2013. Importantly, the IRS announced it will not review individually designed plans, so employers that seek IRS approval will have to adopt a pre-approved prototype or volume submitter plan.
Based on experience with pre-approved 401(k) plans, it is likely to be at least two years before IRS pre-approved 403(b) plans are available. The IRS will announce the end of the remedial amendment period for adopting pre-approved 403(b) plans in future guidance. We would expect the last day of the remedial amendment period to be a reasonable period of time after the IRS begins issuing opinion and advisory letters to pre-approved plans.
Pre-approved Plan Design
Similar to the IRS pre-approved program for 401(k) plans, there are three types of pre-approved 403(b) plans – a standardized prototype plan, a nonstandardized prototype plan and a volume submitter plan.
Prototype plans have two components -- a basic plan document and an adoption agreement that allows employers to make certain choices regarding plan design.
A standardized prototype plan is a plan that (1) offers only elective deferrals or (2) whose plan design offers elective deferrals and non-elective employer contributions on a controlled group basis under a safe harbor formula.
A nonstandardized prototype plan provides more flexibility for the employer regarding non-elective contributions, but offers no assurance that contributions (other than elective deferrals) are non-discriminatory.
A volume submitter plan may have a basic plan document and an adoption agreement, but is not required to. Instead, a volume submitter plan may be drafted more like an individually designed plan.
Scope and Reliance on Opinion/Advisory Letters
The IRS will issue opinion letters to prototype plans and advisory letters to volume submitter plans.
The IRS opinion or advisory letter constitutes a determination that the form of the plan document satisfies the requirements of Section 403(b). It does not constitute an opinion regarding any investment arrangements under the plan or other documents that may be incorporated into the plan by reference and does not express an opinion as to whether the plan is subject to Title I of ERISA.
An employer that is a governmental entity, church or qualified church-controlled organization ("QCCO") and adopts a prototype plan, either standardized or nonstandardized, may rely upon the opinion letter issued to the prototype plan that the form of the plan satisfies the requirements of Section 403(b).
Other tax-exempt employers that adopt a standardized prototype may rely upon an opinion letter that the form of the plan satisfies Section 403(b) as well as the nondiscrimination requirements applicable to contributions.
A tax-exempt employer (other than a governmental entity, church or QCCO) that adopts a nonstandardized prototype plan may rely on the opinion letter that the form of the plan satisfies the requirements of Section 403(b), but has no assurance that contributions (other than elective deferrals) are nondiscriminatory.
An employer that adopts a volume submitter plan may rely upon an advisory letter that the form of the plan satisfies the requirements of Section 403(b) except (1) to the extent that the employer modifies the plan terms (other than by selecting optional terms of the approved specimen plan); and (2) if the employer is not a government, church or QCCO, there is no assurance that contributions (other than elective deferrals) are nondiscriminatory.
An opinion or advisory letter does not provide reliance with respect to the requirements of Section 415 if the employer or any of its related employers maintains another 403(b) plan covering any of the same participants.
Pre-Approved Plan Maintenance
Prototype and volume submitter plan sponsors are required to keep the pre-approved documents up-to-date for changes in the law. Further, pre-approved plan sponsors must have a procedure for notifying adopting employers when the changes are made to the pre-approved plan and of the need to timely adopt the plan or a restatement of the plan. Prototype and volume submitter plan sponsors also must notify adopting employers of the fact that the failure to timely adopt the plan or a plan restatement or to operate the plan in accordance with plan amendments may result in adverse tax consequences.
Correction of Operational and Documentary Failures
In updating its correction procedures, the IRS made several changes related to 403(b) plans. Under the correction procedures, more commonly referred to as the Employee Plans Compliance Resolution System or "EPCRS", employers may generally correct 403(b) plan operational and document failures in the same manner as employers that sponsor 401(k) plans.
Plan Document Failures
If a written 403(b) plan document was not adopted by December 31, 2009 (or the first day of the plan, if later), the employer may submit an application under the Voluntary Compliance Program (VCP) under EPCRS to correct that defect.
403(b) plans with operational failures (i.e. failure to follow plan terms) that occurred on or after January 1, 2009, may now correct such failures under EPCRS using either the self-correction program or the VCP. Similar to the requirements applicable to 401(k) plans, the employer sponsoring a 403(b) plan must have written administrative procedures and in some cases, a favorable determination letter. Pending additional guidance, a 403(b) plan is treated as having a favorable determination letter if a written plan document was adopted by December 31, 2009 or the employer corrects the document failure in accordance with EPCRS.