From Reading Tea Leaves to Reading a Roadmap

February 1, 2013 ( - Reading tea leaves has become an art for 403(b) plan sponsors looking to keep their plans compliant in the wake of the final 403(b) regulations.

If an employer encountered a glitch in the 403(b) plan document or plan operation, there wasn’t a reference point available to confirm how a sponsor’s proposed correction method would be viewed in the eyes of the Internal Revenue Service (IRS).  

Nothing, that is, until December 31, 2012, when the IRS released its updated Employee Plans Compliance Resolution System (EPCRS)—a long-awaited set of rules for employers to reference when correcting operational and plan document defects.  

The latest version of EPCRS—also known as Revenue Procedure 2013-12—updates the original guidance issued in 2008 and translates the correction programs onto the current IRS 403(b) rules.   The expanded guidance addresses the ability for an employer to correct:  

  • A 403(b) plan document defect (either because the plan was not timely adopted or because the document does not appropriately reflect IRS requirements);   
  • An operational defect as a result of failure to follow the terms of the plan document; 
  • Nondiscrimination testing failures with respect to employer contributions; and   
  • Eligible participation failures. 

In addition, the updated ECPRS now provides 403(b) plan sponsors with both a do-it-yourself guide (the Self-Correction Program (SCP)) and a means to make a formal filing with the IRS (primarily, the Voluntary Correction Program (VCP)) to correct plan and operational issues that have arisen since the implementation of the 403(b) regulations in 2009.     

While the new EPCRS aims to get 403(b) plans in compliance with the regulations, it is sensitive to key elements that are unique to these plan types, including:  

  • Calling for a Current IRS Determination Letter:  The IRS would require an employer with a 401 plan to have a favorable IRS determination letter for certain aspects of the EPCRS correction programs.  However, the Service recognizes that 403(b) sponsors currently do not have the ability to adopt an IRS-approved prototype plan document or seek a favorable determination letter for an individually designed plan document.  As a result, the IRS will not require a 403(b) plan to have a favorable determination letter as a prerequisite for using various EPCRS corrections programs.    
  • Meeting the Written Plan Requirement:  Prior IRS guidance required that an employer had to have a written 403(b) plan (with limited exceptions for certain church plans) by December 31, 2009.  But what if a sponsor had not complied with this deadline or its document did not include all of the IRS regulatory requirements?  EPCRS now provides a correction mechanism.  This 403(b) plan document failure, as the IRS terms it, can be fixed using the Voluntary Correction Program if the employer files an application, including Appendix C Part II, Schedule 2; description of the measures taken to ensure that a plan document failure will not happen again; and a user fee. If this issue comes to the IRS’ attention during an audit of the 403(b) plan, the employer can correct the defect through the Audit Closing Agreement Program (Audit CAP).  To encourage employers to bring their 403(b) plan documents into compliance sooner rather than later, the IRS user fee will be reduced by 50%, provided that the VCP application is sent to the Service no later than December 31, 2013.    
  • Matching Operation with Plan Provisions:  Having a 403(b) plan document, but daily operations of the plan that do not adhere to the terms of the 403(b) written plan, would be considered an operational failure.  The ECPRS Self-Correction Program (SCP) enables a sponsor to realign the 403(b) plan document to reflect the plan’s actual administration by amending the plan document.  In keeping with IRS’ emphasis on the need for the plan to have internal controls in place, use of the SCP for operational defects requires that the 403(b) plan have established practices and procedures reasonably designed to promote compliance with Internal Revenue Code requirements. 
  • Correcting Contract Exchanges Gone Awry:  The 403(b) regulations permit a participant to move his 403(b) account only to an approved vendor under the employer’s 403(b) plan or to a vendor who has entered into an information sharing agreement with the plan sponsor.  Prior to the latest EPCRS, IRS guidance provided relief for a 403(b) participant who exchanged contracts after September 24, 2007, to a vendor who did not meet these criteria, but only if amounts were moved before July 1, 2009, back to either an approved vendor under the employer’s 403(b) plan or to a vendor who had entered into an information sharing agreement with the 403(b) plan sponsor.  EPCRS extends this correction method, providing for a defective transfer to be exchanged into a contract issued by a vendor that is authorized to receive contributions under the 403(b) plan.  Absent that correction, a defective contract exchange would be considered to be tracked separately as 403(c) contracts.    
  • Preserving Universal Availability Rules:  EPCRS confirms that one appropriate correction method for excluding eligible employees from making deferrals to the 403(b) plan is an employer contribution equal to 50% of the average deferral percentage for that year of the group of employees (based on whether the IRS considers the employee to be a nonhighly or highly compensated employee) multiplied by the impacted employee’s compensation.  The IRS previously used this method to resolve noncompliant 403(b) plans of public K-12 and higher education institutions under the IRS’ 403(b) Universal Availability Compliance Checks.  
  • Addressing Ineligible Plan Sponsors:  403(b) plans are unique in that only 501(c)(3) organizations and educational institutions can sponsor these types of plans.  EPCRS reiterates the approach taken by the 403(b) regulations when an employer does not fall into either of these categories.  An employer who is not eligible to offer a 403(b) plan can file under VCP, using Appendix C Part II, Schedule 6.  The former 403(b) plan would no longer be able to accept contributions, and participants would only be able to withdraw amounts in accordance with the 403(b) rules.   


While EPCRS reduces the need for reading tea leaves, IRS guidance to assist 403(b) sponsors remains a work in progress.  Based on earlier comments of one IRS official, the Service is anticipated to release a 403(b) Fix-It Guide soon, now that the updated EPCRS has been issued.  As the IRS continues to increase its audit activity, revised 403(b) plan audit guidelines to reflect the 403(b) regulations will hopefully not be too far behind.    


Linda Segal Blinn, J.D.*, is vice president of Technical Services for ING U.S. Retirement.  In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans.   

This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice.  The services of an appropriate professional should be sought regarding your individual situation.  These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document.  The taxpayer should seek advice from an independent tax advisor.  

* Linda is not a practicing attorney.