403(b) Prototype to Allow for Vesting Schedules

The IRS in April announced its intent to offer a prototype program for 403(b) plans (see IRS Releases Proposed 403(b) Prototype Document Program ). A prototype program offers a master plan with adoption agreements containing various plan options that sponsors may elect or not. Adoption of a prototype comes with a determination letter from the IRS guaranteeing plan compliance with IRS rules.

Previously, to get this guarantee, 403(b) plan sponsors had to file for a private-letter ruling from the IRS that their plan complied. Douglas O. Kant, Senior Vice President and Deputy General Counsel at FMR LLC, pointed out that a prototype program would be cheaper for sponsors than filing for a private-letter ruling.

The biggest suggestion among all commenters to the IRS announcement of the program was to allow prototype plans to include vesting schedules (see Trade Groups/Providers Comment on 403(b) Prototype Program ). According to BNA, Flannery said the IRS thought plans did not provide for this, and it “will amend the revenue procedure to allow for vesting of employer contributions.” The amendment will probably apply to government plans too, he said.

BNA said Flannery also addressed concerns about the draft revenue procedure requirement that the plan document terms override individual contract terms, and said the IRS is “taking a hard look” at that section of the revenue procedure to make it workable.

Among the comments, including one from ASPPA itself, was a suggestion for the IRS to consider a volume submitter program, in which an organization requests approval for a sample or specimen plan, which is then adopted by multiple employers. Employers may adopt versions of the specimen plan that have minor deviations in language, making these plans more flexible than prototype plans. In response, Flannery said that in creating the prototype program, the IRS is responding to recommendations made by the Advisory Committee on Tax Exempt and Government Entities, and going forward, it is “seriously considering” including a volume submitter program for Section 403(b) plans, according to BNA.

Under new 403(b) regulations, all plans must have a written plan document in place by January 1, 2010, meaning sponsors cannot wait until the IRS prototype program starts to have a document. The IRS expects to start the program sometime in the spring of 2010.

Douglas O. Kant, Senior Vice President and Deputy General Counsel at FMR LLC, reminded ASPPA conference attendees that required provisions of the plan document include:

• Conditions for eligibility and distributions;
• Compliance with the universal availability rule for elective deferrals;
• Code limitations on contributions, including non-discrimination testing for employer contributions;
• Rules governing hardship distributions, participant loans, plan-to-plan transfers, contract-to-contract exchanges and rollovers into the plan;
• The process for amending the plan; and
• The identification of various administrative functions and the parties responsible for fulfilling them.