A New Compliance Environment for 403(b)s

May 7, 2013 (PLANSPONSOR.com) - Sponsors of 403(b) plans should take note of several recent announcements by the Internal Revenue Service (IRS) concerning compliance with the various requirements their plans must meet to ensure their continued tax-exempt status.

The recent developments continue a trend initiated by the IRS since final regulations covering rules applicable to 403(b) plans were issued in 2007.  

Expansion of Voluntary Compliance Program to 403(b) Plans  

For many years, the IRS has offered sponsors and administrators of 401(k), 403(b) and other tax-qualified plans the opportunity to voluntarily correct operational compliance failures that could cause the loss of the plan’s tax-qualified status. Under that program, known as the Employee Plans Compliance Resolution Program (EPCRS), plan failures may either be self-corrected without involvement of the IRS if the problem is not too severe and is corrected promptly, or with approval of the IRS. EPCRS uses a carrot-and-stick approach to compliance. By voluntarily correcting problems, sponsors spare themselves severe consequences should the problem be discovered by the IRS on audit. For failures that do not warrant self-correction, a plan sponsor may submit an application for a compliance statement from the IRS by paying a “compliance fee” which is significantly less than the penalties that could be assessed should the IRS discover the failure on audit. The benefits of EPCRS are generally not available once a plan is under investigation or a notice of audit has been received.  

In January, the IRS issued an update of EPCRS which expanded the voluntary correction program by permitting 403(b) plans to correct plan document errors. Although this should be welcome news to 403(b) plan sponsors, it also highlights a changed environment for 403(b) plans. In this new world, 403(b) plans are subject to greater IRS scrutiny (and audit), so sponsors and administrators should take care to be diligent about compliance and take steps to ensure that costly problems are addressed before an audit occurs.

Plan Documentation Requirement  

It wasn’t until final regulations were issued in 2007 that sponsors of 403(b) plans were required to maintain a written plan document. Under the final regulations, effective January 1, 2009, 403(b) plans are required to maintain a written plan that satisfies the requirements of the final regulations in both form and operation.  

Plan sponsors who did not satisfy the documentation requirement were given until December 31, 2009, to adopt a written plan that conformed to the final regulations so long as the plan was operated in accordance with a reasonable interpretation of Section 403(b) during 2009 and the sponsor made best efforts before the end of 2009 to correct any operational failure to conform to the written plan document in a manner based on EPCRS principles.  

Plan sponsors who have not timely met the documentation requirement may correct the failure to do so by submitting an application under EPCRS for voluntary compliance. Importantly, for applications made on or before December 31, 2013, the IRS has reduced the normal compliance fee by 50%. To take advantage of the reduced fee, the failure to timely adopt a written plan must be the only failure identified in the application.  

The IRS also recently announced that EPCRS is available to 403(b) plans that did not timely meet the written plan requirement even if they are under audit or receive a notice of audit before April 1, 2013. However, a voluntary compliance application had to be submitted for such a plan before April 1, 2013. Accordingly, 403(b) plans currently under audit or who have received notice of audit should quickly determine if this transition relief will be helpful to them.

IRS Issues Fix-It Guide for 403(b) Plan Sponsors  

On February 21, 2013, the IRS posted a “fix-it” guide on its website identifying ten mistakes that often occur with 403(b) plans and indicating the proper manner of correction. The ten types of mistakes identified include:  

• The organization is not qualified to sponsor a 403(b) plan; 

• The sponsor did not timely adopt a written plan; 

• The terms of the plan were not followed; 

• All employees weren’t afforded the opportunity to contribute; 

• The plan doesn’t conform to statutory limits on contributions; 

• Employees with fewer than 15 years of service were permitted to make catch-up contributions; 

• The plan didn’t limit employee contributions to amounts allowed under the law; 

• Elective deferrals were allowed to be made during the five-year post-severance employer contribution period (for plans offering post-severance contributions); 

• The plan didn’t limit loans or enforce repayments, as required by law; and 

• Appropriate documentation supporting a hardship withdrawal was not obtained. 


While the fix-it guide is helpful, it specifically indicates that 403(b) plan compliance is a focus of the IRS.  

Plan Sponsor Action – Best Practices  

With all of the activity described above, it should come as no surprise that last month the IRS also included among its priorities for fiscal 2013 the initiation of new 403(b) compliance efforts. While that doesn’t necessarily mean plan audits, it is clear that 403(b) compliance is an IRS priority and that 403(b) plan sponsors should get in front of their plans’ compliance rather than wait until it’s too late and the problem has become more costly to fix.  

Here are a few best practice tips that 403(b) plan sponsors can exercise to make sure their 403(b) plans are operated in compliance with their terms and all legal requirements: 

• Make sure that the plan is properly documented and maintained; 

• Periodically review administrative procedures to make sure that they conform to the terms of the plan and applicable law; 

• Periodically “stress test” the plan (for example, follow the path of a loan, hardship withdrawal, new participant election and other day-to-day plan transactions); and 

• Review contributions to make sure they don’t exceed statutory limitations.  


Mike Sanders, Principal, Cammack LaRhette Consulting; Craig R. Erickson, Partner, WISS & Company, LLP; Andrew E. Graw, Partner, Lowenstein Sandler, LLP  


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.