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This new requirement obligates plan sponsors (other than certain church plan sponsors) to formalize some of the key provisions of the 403(b) plan. Until now, only 403(b) plans sponsored by private tax-exempt employers were subject to a written plan requirement.
The written plan requirement does not independently obligate plan sponsors to make changes to their plans. However, in the process of reducing the plan to writing, many plan sponsors are also making new decisions about specific plan provisions, including provisions for loans, hardship withdrawals, third party administration, and availability of catch-up contribution options.
The “Paper Clip” Approach
The final 403(b) regulations do not impose a specific formula for the written plan. To the contrary, they acknowledge that the requirement can be satisfied with a collection of documents, sometimes referred to as the “paper clip” approach, a helpful alternative for many plans, such as public sector plans for which many provisions are contained in state statutes, regulations and administrative rules.
However, a sponsor relying on this paper clip approach will want to keep a record identifying which documents satisfy which requirements. In reality, many plans will follow a modified paper clip approach, with one centralized document and additional provisions found in a variety of documents, including underlying investment products, administrative and service agreements, procedures, and if applicable, state statutes and regulations.
Certain specific matters must be addressed in the written plan, including: eligibility, distributions and benefits, limitations, and available contracts and accounts. Additional optional provisions may also be included.
The IRS published model plan language for plans of public K-12, community colleges, colleges and universities, and is expected to announce a prototype or model plan approval program in the near future. Both the IRS model language and many sample plan documents recognize the potential variations in plan investment products, the majority of which continue to consist of either individual accounts or allocated group accounts with participant subaccounts.
One common issue in establishing the written plan is the continued availability of an existing ERISA exemption for certain 403(b) plans. Private tax-exempt plan sponsors generally have available an exemption from Title I of ERISA for certain 403(b) plans consisting solely of employee voluntary contributions (i.e., no employer contributions or mandatory employee contributions), as long as employer control and discretion fit within specific limitations.
Most such non-ERISA plans have operated solely under the terms of the investment arrangement-with no written plan-and intentionally limited employer control. In 2007 the Department of Labor issued guidance indicating that the ERISA exclusion for these voluntary-only plans was still available, even after adoption of a written plan, provided that the plan and the daily administration did not allocate too much discretion or control to the plan sponsor. The guidance indicated, however, that each case would need to be reviewed on its own merits.
The resulting uncertainty has caused many tax-exempt plan sponsors to more closely review the continued ERISA exclusion for their plans. Some are electing to accept ERISA status for the plan, and in some cases they are choosing to combine the new ERISA plan with another existing ERISA plan. Tax-exempt plan sponsors opting to retain the plan's non-ERISA status will need to exercise considerable caution in adopting a written plan to ensure that employer involvement and discretion are kept below the level that could be expected to trigger ERISA status.
As a critical component for compliance with final 403(b) regulations, plan sponsors should be certain they understand the written plan requirement and update their plan accordingly.
Richard Turner serves as Vice President and Deputy General Counsel for VALIC. Turner has worked extensively with retirement plans and products for 25 years and is a frequent speaker on the topic. He is also a contributing author of the "403(b) Answer Book."