Pre-Approved 403(b) Document Program Furthers Uniformity

Webb, director of technical services at the Horsham, Pennsylvania-based firm, told attendees of the National Tax-deferred Savings Association’s (NTSA) 2014 403(b) Summit, just like other qualified plan types, 403(b)s will have a restatement period every six years, and even non-Employee Retirement Income Security Act (ERISA) 403(b)s will be subject to the amendment requirements. Plan sponsors will no longer have the option of having “specimen plans”—typically, documents that were offered as a model, or to give a gist, of how the plan works, and that were signed off on by plan sponsors’ attorneys.

Webb explained that in the past, different types of documents governed 403(b) plans. There were Internal Revenue Code Section 403(b)(1) annuity contracts, Section 403(b)(7) custodial accounts which provided investments through mutual funds, 403(b)(9) retirement income church accounts (RICAs) for which investments were outlined in the agreements and were not necessarily limited to annuities and mutual funds, and 403(b)(1)/(b)(7) wrap documents which combined annuity and mutual fund investments in a single agreement. The current Internal Revenue Service regulations require all of these investment account types to be maintained pursuant to a plan document just as other qualified plan types are. Underlying annuity contracts and custodial accounts are incorporated by reference in the plan document, and plan sponsors must establish procedures for resolving conflicting provisions—for example, one custodial account provider may offer loans to participants, but the plan overall does not permit loans.

Church plans that are not part of a RICA are exempt from the written plan requirement. In addition, for non-ERISA plans, the IRS says contracts issued before 2005 as part of an employer’s plan may be excluded if they are no longer receiving contributions, and contracts issued from 2005 through 2008 can be excluded if they no longer receive plan contributions and the employer makes a reasonable, good-faith effort to establish information sharing agreements with the orphaned provider. For more about treatment of legacy vendors (see “When a 403(b) Plan’s Exclusive Relationship with One Vendor Really Isn’t”). 

Webb noted that for all 403(b) plans, the written plan document must include all material terms and conditions for eligibility, applicable contributions limitations, benefits under the plan, distributions and products available under the plan. The plan must adhere to the 403(b) regulations in both form and operation, and the plan sponsor may allocate administrative duties to another party, but this does not exempt the plan sponsor from ultimate liability for violations, she added.

The IRS’ pre-approved plan program will offer 403(b) plan sponsors a “prototype” document which has been submitted to the IRS and has been approved as to form (see “What to Know About the 403(b) Pre-Approved Plan Program”). Under the approved prototype documents, plan sponsors may select either a “standardized” or “non-standardized” adoption agreement, from which it may select optional plan features such as loan provisions, employer contributions, or rollover provisions. The options in a “standardized” adoption agreement are designed not only to comply with regulations generally, but also to comply with nondiscrimination rules. A “non-standardized” adoption agreement offers more plan options and some are not necessarily designed to comply with nondiscrimination rules.

Though 403(b) plan sponsors had to adopt a written plan by December 31, 2009, they will be able to restate their plans to adopt one of the prototypes when the IRS makes them available. Those plan sponsors that did adopt their written plans by the 2009 deadline, will also be given a remedial amendment period to retroactively correct plan operational failures—i.e. plan operational practices that did not conform to document requirements or features.

The deadline for providers, attorneys or other entities to submit a document for approval by the IRS under the program is now April 30, 2015 (see “IRS Modifies Procedures for Pre-Approved 403(b)s”). It will take the IRS some time to review them all, but Webb said she thinks it won’t take the agency as long as it does with 401(k) plans and the IRS may announce the availability of pre-approved plans as soon as one year later, or April 30, 2016.

It’s possible many of the plan documents 403(b) sponsors are using now will easily translate to a pre-approved document, but what if a plan sponsor with an individually drafted plan wants to keep that? The IRS has stated it is not establishing a determination letter program for 403(b) plans at this time, so plan sponsors wanting reliance that their plans meet the requirements of 403(b) will have to adopt a plan under the pre-approved plan program. Those wishing to keep their individually designed plans will be unable to apply for an individual determination letter indicating IRS approval. Webb suggested a possibility is for 403(b) plan sponsors to adopt one of the pre-approved plans, have an attorney update language for the features the plan sponsor wants, and apply for a private letter ruling from the IRS that would apply to those features.

Recognizing that many 403(b) plans had contracts with multiple vendors, when the IRS issued its 403(b) regulations in 2007, it allowed for a “paper clip approach” to written plan documents. Plan sponsors could gather all vendor contracts or custodial agreements and create a plan document that reflected all provisions that were treated as part of the plan, with the underlying contracts or agreements attached. Webb said whether the paper clip approach will still work is an unanswered question, but reminded attendees that all operational errors discovered during the paper clip approach should have been corrected by the end of 2009. Plan sponsors still using this approach for their written plan document should check all policies and procedures—such as loan or hardship provisions—in the underlying contracts or agreements to make sure conflicts with the overall plan document have been corrected.

A new requirement for 403(b) plan sponsors that correct operational errors through the IRS Employee Plans Compliance Resolution System (EPCRS) is to get a certification from all vendors that they will cooperate in the corrections as outlined by the IRS.

IRS guidelines for examining 403(b) plans can be found at http://www.irs.gov/irm/part4/irm_04-072-013.html.