The IRS has issued a draft revenue procedure creating a pre-approved plan program for “Section 403(b)” plans sponsored by tax-exempt Section 501(c)(3) organizations or by public schools. Accompanying the draft revenue procedure is draft sample language for prototype plan documents and adoption agreements.
The new guidance will assist employers (or vendors) currently preparing their own 403(b) plan documents to have such a plan document in place by the December 31, 2009 deadline. However, prototype plans under the proposed program will not be available in time to meet that deadline, and their future availability will not relieve employers of the obligation to meet that deadline. And the new guidance has some critical omissions.
Eligible Section 403(b) plan employers, and current or prospective vendors of section 403(b) plan funding arrangements, should take up the IRS invitation to submit comments on the proposals by June 1, 2009.
More Guidance on Section 403(b) Plans
On April 14, the IRS released a draft program for the pre-approval of prototype Section 403(b) plans (Announcement 2009-34, available at www.irs.gov/pub/irs-drop/a-09-34.pdf). The IRS also released 61 pages of sample language, available at www.irs.gov/pub/irs-tege/draft_lrm_403b_prototypes.pdf.
The new guidance is intended to help annuity contract and custodial account vendors, and other prospective sponsors, develop prototype plans for eligible Section 403(b) plan employers. It will also help those employers who must write their own individually designed Section 403(b) plans to cope with the new regulations.
Those regulations, effective January 1, 2009, require every Section 403(b) plan to be maintained under a written plan document reflecting the regulations. The IRS earlier gave some guidance on these issues in Rev. Proc. 2007-71, containing model plan language for public schools), and Notice 2009-3, extending to December 31, 2009, the date by which a compliant plan document has to be in place. For more information on this background, see our client alert “The Clock is Ticking for 403(b) Plans."
The Proposed Prototype Program
Announcement 2009-34 contains a draft revenue procedure, along with a call for comments on the draft procedure, on the sample language, and on any other aspect of the Section 403(b) prototype program generally. Comments are due by June 1. The IRS also asks entities that expect to file an opinion letter application for a Section 403(b) prototype plan, either as a prototype plan sponsor or mass submitter, to identify themselves to the IRS (by June 1) with an indication of how many applications will be submitted; all so the IRS can anticipate its future workload.
According to the draft revenue procedure, prototype Section 403(b) plans will follow the same format as prototype qualified plans, with a “basic plan document” and an “adoption agreement.” The documents will be covered by an IRS opinion letter confirming that the documents satisfy Section 403(b) requirements. The draft revenue procedure states that the documents must contain specified items, and that those terms must override any conflicting terms in the annuity contracts or custodial accounts funding the plan.
As with prototype qualified plans, prototype Section 403(b) plans can come in two forms: “standardized” and “non-standardized.” A basic difference is that the “standardized” prototype plan will automatically satisfy coverage and eligibility requirements, by covering all employees of all eligible employees in the sponsor’s controlled group. Employers that adopt a standardized plan must identify the members of their controlled group -- not necessarily an easy task in light of the new controlled group rules for Section 501(c)(3) organizations promulgated as part of the final regulations.
The “non-standardized” prototype will not automatically satisfy coverage and eligibility requirements, and an employer that wants the comfort of an IRS determination that its Section 403(b) plan satisfies those requirements will have to get its own determination letter -- under a program yet to be proposed.
Limited Relief for Employers
Announcement 2009-34 also gives some relief for plan sponsors for years beginning in 2010. (The relief afforded by Notice 2009-3 only extends through December 31, 2009.) The draft Rev. Proc. will allow employers to retroactively correct defects in the form of its written Section 403(b) plan by timely adopting an approved Section 403(b) prototype and requesting a determination letter.
However, the correction is only effective back to January 1, 2010 at the earliest. Therefore the future adoption of a prototype plan under the program, or even the employer’s documented intent to adopt such a prototype plan retroactively, will not excuse employers from the Notice 2009-3 requirement to have a compliant Section 403(b) plan in place by December 31, 2009.
The sample language devotes some attention to coordinating the administrative responsibilities of the Section 403(b) plan between the employer and the vendor. It sets out seven specific requirements of the “plan administrator” of the plan. The sample language permits the adoption agreement to designate whether employer, vendor, or some other committee or organization is the plan administrator, and to allocate who will perform which duties. But many of the responsibilities -- such as determining whether an employee is eligible and whether the employer is a member of a controlled group -- seem uniquely within the purview of the employer and are unlikely to be assumed by any vendor.
The sample language goes on to address most or all of the required features of a Section 403(b) plan under the regulations, first for plans that have only employee deferrals, and then the additional requirements for plans that have employer matching or discretionary contributions. The sample language -- at least when finalized -- will assist drafting any Section 403(b) plan, particularly where it varies from the sample language addressing the same requirement in the public school model plan previously issued by the IRS.
While the additional guidance is welcome, many significant questions and open areas remain. Two omissions are particularly significant:
ERISA. Nongovernmental Section 403(b) plans with employer contributions are subject to the Employee Retirement Income Security Act of 1974 (ERISA). Nongovernmental plans with only employee deferrals may also become subject to ERISA when the employer undertakes the functions mandated by the regulations. ERISA fiduciary and other requirements can be enforced by any participant in Federal court.
IRS approval does not address ERISA and use of a prototype plan will not eliminate ERISA exposures. Indeed, the draft sample language addressing some matters also regulated by ERISA (such as the time to transmit employee deferrals to the vendor) will not necessarily satisfy ERISA requirements. Prototype sponsors may end up having to develop two separate plan documents (or a separate ERISA rider) to have a document compliant with ERISA (and protective of the employer) for employers subject to ERISA, while not foisting ERISA requirements on those employers exempt from them.
Coordination with Multiple or Terminated Vendors. The IRS will not review the terms of any custodial accounts or annuity contracts. It will only review the prototype plan and adoption agreement documents themselves. According to the draft revenue procedure those plan documents must override any inconsistent provisions of the investment arrangements under the plan.
This is fine where the employer has and has always had only a single vendor under its Section 403(b) plan, which is the vendor supplying the prototype plan. But it presents a problem where the employer has multiple vendors, and particularly discontinued vendors, whose contracts are nevertheless stuffed into the “plan” by the new regulations. The contracts of different vendors may differ (or on the employer may want to impose differences) as to whether loans, transfers and hardship withdrawals (for instance) are permitted and on what terms.
Indeed, it may be questionable under the law (either ERISA or state law, whichever applies to the particular plan), whether an employer’s new plan document can actually override inconsistent provisions of (say) an annuity contract between an employee and a former vendor to which the employer is not a party. Thus prototype plans will have to be used with caution, if at all, where there are multiple or prior vendors whose contracts must be treated as part of the “plan.”
On these and other issues, interested parties may want to submit comments to the IRS before June 1 deadline. The details of the draft sample language and the prototype program procedures will undoubtedly be adjusted before the being finalized; and more basic issues might also be addressed. In the meantime, the draft language provides some guidance for employers who must meet the December 31, 2009 deadline for having a signed plan document. And the proposed prototype program offers the hope of some eventual administrative simplicity for those employers whose Section 403(b) arrangements are in position to ultimately take advantage of it.