Compliance Issues for 403(b)s

June 28, 2013 ( – Some retirement plan compliance issues are unique to 403(b)s.

After years of waiting, 403(b) plan sponsors were finally provided with correction procedures for errors when the Internal Revenue Service (IRS) released an updated Employee Plans Compliance Resolution System (EPCRS) in January (see “A New Compliance Environment for 403(b)s”). Susan Diehl, QPA, with PenServe Plan Services in Horsham, Pennsylvania, told attendees of the 2013 National Tax-Sheltered Accounts Association (NTSAA) 403(b) Summit that many of the corrections are similar to the corrections for 401(k) plans, but since 403(b)s have some unique allowable features, such as catch-up contributions for employees with 15 years of service, corrections were added solely for them.

One thing the new EPCRS requires, since 403(b)s often have multiple service providers (vendors), is that plan sponsors must attempt to get signed certifications from all vendors that they will help with corrections, according to Diehl.

The IRS also recently announced a pre-approved plan document program for 403(b)s (see “What to Know About the 403(b) Pre-Approved Plan Program”). Richard Turner, deputy general counsel at VALIC in Houston, Texas, pointed out that the agency announced it is not offering a plan determination letter program, so if plan sponsors want an IRS-approved plan document, it must fit into a prototype or volume submitter plan offered in the program. Turner added that, under the program, church plans can now have a pre-approved plan document.

M. Kristi Cook, Tax-Exempt and Governmental Plans Consultant (TGPC) and attorney in Jenkintown, Pennsylvania, noted that K-12 plan sponsors can still use the model plan language provided by the IRS in 2007 (see "IRS Offers Model 403(b) Plan Language for Public Schools") and have reliance that their document is compliant as if the IRS issued a private-letter ruling. However, the model language is not updated for any new guidance, so plan sponsors will have to update their plans.

According to Diehl, the model language contains two errors: it includes provisions for ADP testing, which is not required for K-12 plans, and it includes provisions for accepting rollovers from Roth IRAs, which is not allowed. She said the IRS will help plan sponsors with corrections for these upon audit and not charge a fee.

Last year, sponsors of Employee Retirement Income Security Act (ERISA)-governed 403(b)s scrambled to comply with new Department of Labor (DOL) fee disclosure rules. Many reported that all the hoopla was for nothing, and participants did not even pay attention to fee disclosures, and nearly two-thirds said the service provider disclosures they received did not lead to plan changes (see "403(b)s Report Little Impact from Fee Disclosure"). However, Carol Gransee, with Oppenheimer Funds in Centennial, Colorado, told Summit attendees a survey from Boston Research Group indicated quite a significant number of participants paid attention: 50% of participants read the fee disclosures they received and 40% changed their asset allocations as a result.

Gransee said regulators are now talking about requiring a roadmap or guide also be sent to participants telling them where to find certain fee information in the disclosure documents. She added that there has also been dialogue among regulators about requiring disclosures for non-ERISA 403(b) plans.

The retirement plan industry is still waiting on the re-proposal of a new definition of fiduciary from the DOL (see "Saxon Angle: Straight from the Source"). The new definition will obviously apply to ERISA-governed 403(b)s, but many plans, including non-ERISA 403(b)s are also governed by state law, Cook noted. In some states, if any assets are held in trust, the plan sponsor is a fiduciary, she added. Then, of course, there are Securities and Exchange Commission (SEC) rules, which apply to both ERISA and non-ERISA plans. Cook said with every task or decision a plan sponsor engages in, they should ask "for what purpose" am I doing this? Then, they should ask what DOL, state or SEC rules apply to that task or decision. Plan sponsors should be acting in the best interest of participants.