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Clean Up on Aisle 403(b)

August 7, 2012 ( - It is 2012, but some 403(b) plans are looking back to the past – 2009 to be exact.  Why?

By PS | August 07, 2012
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2009 is now an open year for Internal Revenue Service (IRS) audits – and notably the first year the final 403(b) regulations became effective.  So, 403(b) plan sponsors who have been selected for audits are helping test the waters to determine both the success of the Service’s pre-2009 outreach efforts and the extent to which an employer may have encountered difficulties in implementing the 403(b) regulations.    

Even if your 403(b) plan is not under examination, this serves as a good reminder to review your plan so that you can identify and fix any outstanding issues now to help you sail through a potential audit in the future.  The following items are important to review periodically so that you can keep your plan in compliance with the final regulations.  

You Got a Plan for That?  

IRS guidance requires an employer (other than some church entities) to have had a written 403(b) plan in place by December 31, 2009 – regardless of whether the plan operated on a fiscal or calendar year.  For the most part, employers heeded this deadline and timely adopted their 403(b) plan documents.    

But this is only part of the requirement pertaining to running your 403(b) plan.  The IRS will also be looking to see that the terms of the plan match how the plan is in fact being operated.  For example, suppose the plan document states that all employees are eligible to make deferrals to the plan.  How would the IRS know if, in practice, part-time employees were either excluded from participating or not informed about the opportunity to make deferrals into the 403(b) plan?  An IRS auditor may seek validation from the employer’s human resources and payroll departments to determine any disconnects between the plan as written and the plan as operated.  Any disconnects could highlight defects either within the plan’s written document or in the day-to-day plan administration.    

The IRS anticipated that some 403(b) employers may need to clean up their plans.  As a result, the Service is expected to soon issue its updated Employee Plans Compliance Resolution System (EPCRS).  The new version of EPCRS will provide 403(b) plan sponsors options to correct their plan documents – for those documents that do not capture the IRS regulatory requirements -- as well as to correct operational errors for plans that do not operationally follow the written terms of the plan.    

Confirm now that you are able to produce your 403(b) plan document and that the written plan is consistent with how the plan runs operationally so you are prepared if asked during an IRS audit.  

Sharing Is Caring  

The final 403(b) regulations also introduced the concept of “information sharing”.  This means that before processing a participant’s request for a loan, hardship, or distribution due to severance of employment, the plan sponsor and product providers must coordinate to confirm the participant has satisfied the conditions for a withdrawal.  The IRS was concerned that a participant might not appreciate the ramifications of the legal requirements – particularly when the primary goal is to gain access to his or her account.  The requirement to share information minimizes this concern by requiring the employer and investment providers to coordinate with each other before processing money out transactions.