403(b) Summit: A Plan in Place

April 29, 2009 (PLANSPONSOR.com) - Panelists at the PLANSPONSOR 403(b) Summit debated the merits of the proposed prototype plan document and determination letter program and also reviewed best practices for plan documents.

class=”NoSpacing”> Although he said he expects the answer might change, at the conference Vince Rainforth, VP Tax Exempt Market at Principal Financial Group, said “as of today I would wait and see” before moving to the prototype document.

class=”NoSpacing”> 403(b) programs allow for sponsors and sponsoring entities to design a plan, including features they decide are important. The ability to build a plan may not allow them to use the prototype document, Ed Salyers, Senior Employee Plans Specialist at the Internal Revenue Service (IRS), noted because that requires adoption of the basic plan prototype set forth by the IRS (see IRS Releases Proposed 403(b) Prototype Document Program ).

class=”NoSpacing”> On the good side, said Salyers, the prototype documents are simple and cheap. Some of the cost savings associated with the prototype program is that the document already exists, unlike an individually designed plan, for which the drafting of the document might be costly. Further, as regulatory changes are made, vendors will change their documents, which will likely then be provided to plan sponsors, but this will require custom changes and amendments to their documents, which will add costs.

class=”NoSpacing”> However, the con of using the prototype documents, according to Salyers, is that the plan sponsors must make sure that the document “really meets the needs of your entity.” For example, the prototype document currently will not allow for vesting schedules, which might be a problem for some plans. The lack of vesting in the prototype document is a “large challenge,” Rainforth said. Salyers encouraged attendees to make comments to the IRS while the draft language is out if sponsors see issues with the language.

class=”NoSpacing”> Plans that are subject to the Employee Retirement Income Security Act (ERISA) should already be operating under plan documents for the Department of Labor, (DoL) even though they were not required by the IRS, Salyers said. Rainforth said plan sponsors should start creating their document immediately, if in fact they don’t have one already.

class=”NoSpacing”> Sponsors considering whether to use the new program must consider whether their plan matches the prototype document or if they will move to an individually designed plan and submit for a determination letter. Why should sponsors have a determination letter? A determination letter says the plan document and forms satisfy IRS regulations. Sponsors can rely on that for protection when the IRS comes to do its exam, Salyers said.

class=”NoSpacing”> Plan sponsors have to make sure that the plan document and adoption agreement agree and that the plan sponsor knows what the documents say, Michael Kozemchak, Managing Director at Institutional Investment Consulting, an NRP member firm, noted. When plan sponsors approach the IRS with a question, Salyers said, the IRS will first ask the sponsor what the plan document says. When sponsors move forward if they have something in an adoption agreement that doesn’t match the plan, that will be a problem, Salyers continued. “We want to know about the process,” he said. “The operation of the plan has to match the documents, something that requires plan sponsors to set up processes for plan procedures, including enrollment and eligibility, withdrawals, and hardship distributions, among other things.”

class=”NoSpacing”> When determining which way to go, vendors and consultants are a plan sponsor’s “best sources of reconnaissance,” because they “can tell you what others are doing,” Kozemchak said. They can also be a sponsor’s partner in developing plan documents, he commented.