Case of the Week: Plan Documents for 403(b) Plans

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. A recent call with a financial advisor from Washington is representative of a common inquiry related documents for 403(b) plans. The advisor asked:

“Must all 403(b) plans be maintained according to a written plan document?”

Highlights of Discussion

With a couple of exceptions, an arrangement will not satisfy Internal Revenue Code Section (IRC §) 403(b) unless it is part of a written plan that satisfies Treas. Reg. § 1.403(b)-3(b)(3). The exceptions to the requirement to have a written plan document apply for certain 403(b) plans maintained by churches and certain grandfathered 403(b) annuity contracts issued prior to Jan. 1, 2009.

Sponsors of 403(b) plans must maintain them under a written program that contains all the terms and conditions for eligibility, benefits, limitations, the form and timing of distributions, contracts available under the plan, and the party responsible for plan administration. The IRS has said that the written plan requirement does not, necessarily, mean a single document. For example, the plan can consist of multiple documents that contain the various plan provisions regarding salary reduction agreements, contracts that fund the plan, eligibility rules, how the plan will pay benefits and the nondiscrimination rules.

The IRS has issued model language for 403(b) plans in Revenue Procedure 2007-71 and Listing of Required Modifications. While the model plan language in Rev. Proc. 2007-71 is directed toward public schools, other sponsors of 403(b) plans may use the language as a guide when drafting their plans. The IRS also has a pre-approved plan program for 403(b)s (Revenue Procedure 2013-22), under which it will review prototype and volume submitter plans of document providers and issue approval letters (i.e., opinion or advisory, respectively). An employer that adopts a 403(b) pre-approved plan generally has assurance that its plan document complies with IRC §403(b).

The deadline for 403(b) plan sponsors to adopt written plans or amend their existing written plans that were effective in 2009 was Dec. 31, 2009, with a plan effective date of Jan. 1, 2009. If the lack of a plan document is discovered before an IRS audit, plan sponsors can correct the error through the IRS’ Voluntary Correction Program under the Employee Plans Compliance Resolution System (see the IRS’ 403(b) Fix-It Guide). If the lack of a document is discovered during an audit, the sponsor must use the IRS’ Closing Agreements Program to fix the error. The first step in correcting the error is to adopt a plan.

The written 403(b) plan requirement does not apply to contributions by a church, unless the contributions are made to a retirement income account under IRC §403(b)(9) and Treas. Reg. § 1.403(b)-3(b)(3)(iii). A retirement income account must be maintained pursuant to a written plan, which must state the intent to constitute a retirement income account [See Treas. Reg. § 1.403(b)-9(a)(2)(ii)].

As mentioned, some grandfathered contracts are exempt from the written 403(b) plan requirement, including contracts issued —

1) before Dec. 31, 2004, to which contributions have ceased; and

2) between Jan. 1, 2005, and Dec. 31, 2008,

  • that are no longer receiving contributions;
  • that the employer has made a good faith effort to include as part of the employer’s plan by collecting available information about the issuers; and
  • where the employer has notified the issuers of the plan administrator’s name and contact information to coordinate information necessary to satisfy the requirements of IRC §403(b).

Conclusion

Since 2009, most 403(b) plans are required to be maintained according to a written document or documents. The IRS has sample language available, a pre-approved plan program and formalized correction procedures to assist with compliance in this area.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2018, Retirement Learning Center, LLC. Used with permission.

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