(b)lines Ask the Experts – Plan Determination Letters

“I was not aware that this was the case. Am I correct, or is the consultant?”  

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:  

You are correct, but, to be fair to the consultant, there is some basis for that information, and some recent guidance was issued that provided some important clarification on this issue. Before we address that guidance, however, you may recall a recent Ask the Experts column (see “Ask the Experts Still No Prototype Program”) in which we anticipated the release of an Internal Revenue Service (IRS) program to approved vendor prototype plan documents. In that Q&A, we stated that it was “unlikely” that an approval program for 403(b) plan documents, in the form of a determination letter, would be required, since it is not required for qualified plans such as 401(k) plans. However, we suggested that, such approval, though not required, would become customary for 403(b) plans, as it is for qualified plans.  

However, that is not to be, at least for the foreseeable future. The IRS, in its recent revenue procedure (2013-22) announcing the release of its prototype program for 403(b) plans (see “IRS Establishes Program for Preapproved 403(b) Plans”) stated that there will be no individual determination letter for 403(b) plans, and that plans seeking IRS approval should utilize a vendor prototype (or volume submitter) document.  

The problem with that approach is that there are many individually designed plans of which the Experts are aware that contain customized features that will be likely incompatible with vendor prototype documents. So what is the best course of action for such plan sponsors? One possible avenue in the past was to obtain a private letter ruling from the IRS. It was a more complex and expensive process than a determination letter program likely would have been, but it provides IRS approval as to the form of the plan document similar to what the determination letter program would have provided. However, it is not clear at this time whether the IRS will continue to issue private letter rulings with respect to 403(b) plans. The adoption of a vendor prototype could be considered, but that may require amendments to the existing plan that may be undesirable or impractical.  

Thus, the best advice for 403(b) plan sponsors is to consult with counsel well-versed in such issues as to the best course of action to take, as well as the appropriate timing for such action – and watch as the new IRS prototype and volume submitter program develops to see what may be best for your plan.