403(b) Written Plan Failures and Examinations

June 15, 2012 (PLANSPONSOR.com) - Monika Templeman, Director of Employee Plans Examinations at the Internal Revenue Service (IRS), discussed the temporary guidance the agency has given to examination agents auditing 403(b) plans for the 2009 plan year and forward.

In the IRS’ Employee Plans News newsletter, Templeton noted the current Employee Plans Compliance Resolution System (Revenue Procedure 2008-50) does not offer relief for failing to comply with new written plan requirements. Therefore, the agency developed temporary guidance for the exam agents’ use until an updated EPCRS revenue procedureis released.   

If any 403(b) plan operational errors fall under the definitions of Revenue Procedure 2008-50, the agent works the examination under normal procedures. Generally, if examination agents discover a failure to meet the requirements in Notice 2009-3, they will prepare an Audit Closing Agreement, but use a sanction closer to the fees that would be paid under the Voluntary Correction Program.   

The amount of the sanction depends on: 

  • How the plan sponsor complied with the Notice 2009-3 requirements prior to being informed of the audit; 
  • Whether the plan sponsor timely adopted the 403(b) written plan; 
  • Whether the sponsor is operating the plan according to the written plan requirements; and  
  • Whether there were other failures. 


Templeton also noted that IRS Announcement 2009-89 provides a remedial amendment period for 403(b) plans that met the requirements of Notice 2009-3 or were new plans adopted after December 31, 2009. Generally, if the plan sponsor either adopts a pre-approved prototype plan or applies for an individual determination letter, they have reliance that their document satisfies the 403(b) written plan requirements beginning on the later of January 1, 2010, or the plan’s effective date. The plan sponsor must, however, correct all form defects in the written plan retroactive to the applicable date.  

If the plan falls under the remedial amendment period but has form defects, Templeton said, the agent will request an amendment to correct the form defect and help prevent operational defects. If the plan’s sponsor chooses not to make the amendment because its plan is in an open remedial amendment period, the agent will add the plan to a list for follow-up, which could be another examination.

During an IRS phone forum, Sherri Edelman Tax Law Specialist, Employee Plans, Rulings and Agreements Technical Guidance and Quality Assurance, said the 403(b) prototype program is in the clearance process, which is a lengthy process to ensure the guidance issued is correct. 

While the IRS is glad employers are interested in the pre-approved plan program, Edelman says it should not be their primary focus. Sponsors should focus on compliance with Notice 2009-3 and that the plan’s operation follows the written plan.  

Ed Salyers, Senior Employee Plans Specialist – Examinations, told forum attendees if they have not adopted a written plan, adopt one now! He says in examinations, if an agent finds a defect and the plan sponsors plans to adopt a prototype document, the agent will wait until the prototype program is out because sponsor will have the remedial amendment period to correct the defect.  

According to Edelman, common written plan errors have found include: the written plan was not adopted by 12/31/2009; haste in adopting the written plan resulted in form errors; and operation not following the terms of the plan document. 

Salyers says plan sponsors should know the provisions in their plan documents and monitor to see that those provisions are followed.