On December 11, 2008, the Internal Revenue Service issued Notice 2009-3 (to be published in the January 12, 2009 Internal Revenue Bulletin) providing conditional relief from the “written plan” effective date in the July 2007 Treasury regulations under section 403(b). Pursuant to those regulations, the tax law for the first time requires public schools and tax-exempt organizations offering a section 403(b) retirement program for employees to adopt a “written plan.” Under the regulations, that written plan must be adopted on or before December 31, 2008, for the contracts purchased under an employer’s program to retain section 403(b) status.  

Under Notice 2009-3, the Service will not treat a section 403(b) plan as disqualified in calendar year 2009 provided that:  

  • The employer adopts a written plan intended to satisfy the regulations on or before December 31, 2009, effective retroactively to January 1, 2009;
  • During 2009, the employer operates the plan in accordance with a reasonable interpretation of section 403(b), taking into account the final regulations; and
  • Before the end of 2009, the employer uses its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written plan. The correction is to be based on the general principles of the Service’s EPCRS correction program. (The Service previously announced its intention to update the EPCRS program for the new section 403(b) regulations, but has not yet done so.)  

The consequences of this Notice appear to be as follows:  

  • The Service did not accede to the requests it had received to generally postpone the effective date of the new regulations.
  • The Service did, however, recognize that it is an ongoing process for employers to implement both the written plan requirement and the changes in operational systems and procedures required by the final regulations. The Service effectively accorded a one-year grace period – limited to calendar year 2009 – for employers to come into compliance with the new requirements, provided that the employer operates the program reasonably during that grace period and satisfies a “best efforts” undertaking (apparently a higher standard than reasonableness) to correct any operational defects prior to the end of that grace period.
  • Section 403(b) programs that have written plans in place prior to 2009 appear to be within the scope of the Notice. If so, these plans also have available the relief provided by the Notice for the operational issues and delays that predictably will occur as all employers adapt in practice to the new processes required by the regulations.
  • The rules in the Notice apply on a calendar year basis and must be satisfied by December 31, 2009, even if the plan is operated on a school year or other basis that is not the calendar year.
  • Unlike for the written plan, there is no specific grace period for the information sharing agreements that are required for certain transfers among section 403(b) products, but the operational relief generally provided by the Notice may be applicable.

In the Notice, the Service also confirmed its plans for further programs to facilitate compliance with the section 403(b) written plan requirement, including:  

  • A prototype plan program, with sample plan language. We understand the Service is undertaking to publish, for comment, a draft revenue procedure on the prototype program in the first months of 2009.
  • A determination letter program for individually designed section 403(b) written plans, to follow the establishment of the prototype program.