Maintaining compliance for 403(b) retirement plans historically has been challenging given the lack of historical regulatory oversight, guidance from the Internal Revenue Service (IRS), and non-profit organizations’ limited resources. But the IRS has taken steps to address this, including publishing a list of providers offering pre-approved prototype plans and creating a remediation period ending in March 2020 for sponsors to self-correct non-compliant plan documents.
Background on 403(b) Compliance and Remediation
In 2007, IRS regulations were updated to require sponsors of retirement plans that fall under the Internal Revenue Code 403(b) to adopt and follow a plan document for their retirement plans as of January 1, 2009. Subsequently, relief was granted to extend this deadline to January 1, 2010. Before this time, many 403(b) plans did not have a plan document outlining specific operational and governing terms of the plan.
The IRS didn’t provide robust guidance on how to create the plan document, so many plan sponsors made a good faith effort and cobbled together a collection of investment, administrative and service provider agreements—often referred to as the “paper-clip approach”—to comply with the new requirement.
In March 2013, the IRS made things a little easier by issuing a new ruling, Revenue Procedure 2013-22, which created a pathway for the agency to issue advisory letters for 403(b) prototype plan documents. The program offers sponsors of 403(b) plans an alternative to adopting individually designed plans in order to satisfy the written plan requirements of the 2007 regulations. The IRS will issue opinion letters on 403(b) prototype or volume submitter plans. By adopting a prototype or volume submitter plan that has already received an IRS opinion letter, the sponsor can feel confident that they have satisfied the latest regulatory requirements.
The IRS, however, didn’t avail this program to plans with individually designed plan documents, as this was not considered the best use of the Service’s limited resources. Considering there is no IRS determination letter process available to individually designed 403(b) plans currently, plan sponsors do not have many other choices. The best option of individually designed plans would be to hire an ERISA attorney to provide assurance that their plan documents were up to date with the latest regulations.
Under Rev Proc 2013-22, the IRS offers a remedial amendment period, giving 403(b) plan sponsors the ability to restate or amend their plan documents to comply with the law. Eligible plan sponsors—ones that had a plan document in place by January 1, 2010—are allowed to correct certain defects that go back to the original effective date of the plan. The types of defects that can be corrected under the remedial amendment period would be missing amendments for certain regulatory updates such as EGTRRA and the HEART Act to name a few. But again this remediation period only applies to those plans using prototype or volume submitter plan documents.
Finally, in 2017, the IRS announced that it would close the remedial amendment program on March 31, 2020. Plan sponsors who have a prototype plan document have until this date to retroactively fix any regulatory compliance issues they may have.
What if your organization failed to adopt a plan document as of January 1, 2010? There is a fix for that. The plan should file through the voluntarily correction program under the IRS EPCRS program. Unfortunately, Rev Proc 2013-22 does not give folks who miss the boat in 2010 until 2020 to fix a missing document.
Perhaps during the process of reviewing your plan document, you find an operation error. An operational error is a mistake that occurs when the plan is not complying with the terms of the plan document. For example, a plan document might allow all employees to participant in a 403(b) plan, but in operation, the HR department is not allowing part time employees to participate. These types of operation errors cannot be corrected under Rev Proc 2013-22.
But not to worry. Correcting operation errors can be daunting. So the IRS created the 403(b) Plan Fix-It Guide, which lists common errors, as well as how to find, fix and avoid them. The IRS also published a more general informational publication about 403(b) plans and resources to help plans stay in compliance.
It’s important for plan sponsors to start examining their plan documents now, to determine if they are in compliance with the latest regulations. Amendments may take months to prepare and adopt. Just like filing taxes, the closer you get to the deadline, the harder—and possibly more costly—it will be to address any issues that need to be resolved.
As a resource, the IRS created a list of providers offering pre-approved 403(b) prototype plans, making it easier for plan sponsors to ensure their plan is in compliance with the law. Plan sponsors with individually designed 403(b) plans don’t have to adopt a prototype plan, but staying on top of the necessary amendments may be time-consuming. The IRS has also published a Required Amendments List that plan sponsors can reference each year when determining if another update is needed.
Feeling good about your plan document because it was prepared by your plan’s service provider? Be sure to check that it is the latest version and whether a version with an IRS opinion letter is available. Often pre-approved prototype providers will send messages to notify plan sponsors about updates to the law and required amendments to comply with the federal changes. Check with your provider to make sure that service is offered.
To be clear, all remedial amendments to 403(b) plans should be adopted back to the January 1, 2010. If you adopt a new prototype as of 2019 going forward, your plan document before 2019 may still not be in compliance. Be sure to adopt retroactively to 2010 as allowed under the Rev Proc. Plan sponsors can adopt a pre-approved 403(b) plan prior to the March 31, 2020, deadline as an alternative to creating amendments to an existing plan.
Lastly, plan sponsors should engage an attorney who is an expert with the 1974 Employee Retirement Income Security Act (ERISA). By selecting an ERISA attorney, plan sponsors can be more confident that they are following IRS rules when it comes to amending plan documents. Your BDO representative can also help with questions you may have concerning the retroactive fixes to your 403(b) plan document.
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