IRS Expands Pre-Approved 403(b) Plan Options to Streamline Compliance

Employers eligible to sponsor 403(b) retirement plans now have expanded opportunities to simplify compliance and reduce administrative costs by adopting IRS-pre-approved 403(b) plans, according to newly released updates from the IRS.

All 403(b) plans—excluding certain church plans that do not include retirement income accounts—must satisfy the written plan requirement. To meet this, eligible employers may now adopt a pre-approved 403(b) plan, rather than drafting a custom, individually designed plan. This approach offers a more accessible path to compliance, often at lower cost, according to the IRS.

Employers that adopt a pre-approved plan generally receive assurance from the IRS that the plan document complies with Internal Revenue Code Section 403(b).

Importantly, employers can only adopt a pre-approved plan after the plan provider receives a favorable opinion or advisory letter from the IRS.

Benefits of adoption include:

• Cost savings: Pre-approved plans are typically more affordable than individually designed ones;
• Legal assurance: The IRS’s favorable opinion or advisory letter offers confidence that the plan meets formal requirements; and
• Flexibility: These plans often include optional provisions that employers can customize through an adoption agreement.

However, despite the benefits, the IRS cautioned employers that favorable letters: do not cover the legality of specific investment arrangements such as annuity contracts; do not ensure compliance with the Employee Retirement Income Security Act; and do not apply if the plan document is modified beyond approved parameters.