SPARK Institute Seeks IRS 403(b) Guidance

August 13, 2013 ( – The SPARK Institute has requested guidance from the Internal Revenue Service (IRS) relating to 403(b) retirement plans.

“The 403(b) prototype plan and Employee Plans Compliance Resolution System (EPCRS) programs will be useful to plan sponsors and their service providers,” said Larry Goldbrum, general counsel of The SPARK Institute. “Our request seeks clarification regarding a number of issues and makes recommendations that are intended to make these programs as available as possible to the broadest segment of the 403(b) community.”

On the topic of a pre-approved plan program, the Institute said, “Because investment arrangements used to fund 403(b) plans generally contain many of the provisions required to be included in 403(b) plans, there are likely to be duplicate provisions in the plan and the investment arrangements. It is unclear to what extent those provisions can be incorporated by reference into the terms of the investment arrangement (or omitted altogether) where the investment arrangement is funding a pre-approved plan.”

SPARK asked the IRS to issue a list of the tax compliance provisions that must be included in all plans and investment arrangements, and a subset of provisions which can be incorporated by reference from the plan into the investment arrangement (or omitted altogether) if the investment arrangement is used in conjunction with a plan that contains such provision.

With the topic of the EPCRS, the Institute said, “Because of the complexity of the annuity contract, there is a high probability that a contract provision may not be identified initially as being in conflict with a term in the pre-approved plan. This conflict, once identified, could result in an inadvertent operational failure.” The letter asks that in such a situation, the operational error be allowed to be corrected by a retroactive plan amendment that makes the pre-approved plan document conform to the terms of the investment arrangement documents.

For vesting and separate account requirements, the letter recommends the IRS confirm that the final 403(b) regulations are “not intended to require that a separate annuity contract or account be used to hold forfeitable amounts.” The IRS is also asked to clarify that “unvested amounts can be held in the same contract or account that is used to fund the plan, as long as the unvested amounts can be separately identified and accounted for.”

The Institute said there are government plans that use a grandfathered vesting schedule, and it is unclear whether these vesting schedules, otherwise permitted for government plans, can be used in the pre-approved plans. The letter asks the IRS to confirm that the grandfathered vesting schedules from pre-1974 can be permitted in these 403(b) plans.

In the case of mandatory pre-tax employee contributions, the Institute points out that “while the pre-approved plans will serve many plan sponsors, some will have difficulty utilizing pre-approved plans without the ability to make substantial changes in the documents because of their particular plan designs.” One such design is the requirement that employees contribute a percentage of their compensation on a pre-tax basis as a condition of employment. The Institute “urges the IRS to expand the pre-approved plan program to make clear that sponsors can include and will receive approval of plans that allow mandatory pre-tax employer contributions.”

With required minimum distributions (RMDs), the Institute said, “Neither vendors nor plan sponsors will know definitively if terminated participants have satisfied their RMD requirements from a particular plan because the participant’s full RMD amount may be distributed from any investment arrangement under any plan. Plan sponsors may have no contact with participants who terminated years (and possibly decades) earlier. It is not clear what responsibility a plan sponsor (or the plan’s vendors) will have with respect to satisfying RMD requirements from the investment arrangements issued under a specific plan.” The letter requests that the IRS acknowledge the limited ability of plan sponsors and vendors to ensure participants are complying with RMD rules, and to state that compliance is the participant’s responsibility.

With regard to the use of the EPCRS by employers that sponsor both 403(b) and 401(a) plans, the Institute points out that it is unclear whether 403(b) and 401(a) plans can be covered in one Voluntary Correction Program (VCP) submission under EPCRS to resolve the error. In addition, “the compliance fee under Section 12.02 of Revenue Procedure 2012-13 is generally based on the number of participants in the affected plan(s). If an error with the same root cause affects multiple plans, but employees participate in more than one plan, the number of participants will be double-counted and the compliance fee will be higher than reasonably intended by the IRS.”

For the first item, the letter asks that the IRS clarify that single VCP submissions may include a single submission to correct errors in both 401(a) and 403(b) plans. For the second item, the letter asks that “when a tax-exempt or governmental employer maintaining multiple plans submits a filing under EPCRS for an error that affects more than one of its plans, the compliance fee be determined by aggregating the total number of individuals in all of the affected plans and counting each individual only once even if in more than one plan.”

With regard to the application of Revenue Procedure 2007-71 to Revenue Procedure 2013-22 and Revenue Procedure 2013-12, the Institute noted several concerns. One is that “in the event of a conflict between the terms of the plan and the terms of the investment arrangements, the terms of the plan will govern.” However, while the plain language of Revenue Procedure 2007-71 would seem to have grandfathered contracts to be treated as outside of the plan for purposes of adopting a pre-approved plan, “Revenue Procedure 2013-22 did not explicitly address this issue.” Another concern deals with the revised EPCRS program under Revenue Procedure 2013-12. “To the extent other employees during the years of the overcontribution hold grandfathered contracts that now cannot be identified, the sponsor could not contribute the additional amounts required by the correction method.”

In the letter, the Institute recommended that “the principles of Revenue Procedure 2007-71 should be explicitly applied to the pre-approval program.” It also ask that the IRS “make clear that any investment arrangement that would not be considered part of the plan under Revenue Procedure 2007-71 should not be part of a pre-approved plan and should not be considered in determining whether the plan and the investment arrangements are in conflict.” Additionally, it asks that with respect to grandfathered contracts and EPCRS, any grandfathered contract that cannot be identified or where the issuer is not cooperative should not be required to be considered under the corrections process. Finally, the IRS is asked to modify the representation required to be submitted by 403(b) sponsors in a VCP filing to reflect this reasonable, good faith standard with respect to grandfathered contracts.

With regards to correction of a failure to adopt a written 403(b) on a timely basis, the Institute noted that “submitting two separate VCP filings, one to correct an untimely adoption and another to correct an operational error, in order to bring into compliance a plan that had been untimely adopted, is cumbersome and administratively burdensome.”

As a solution, the letter asks that the plan document being filed under the VCP to correct the untimely adoption be allowed to supersede the document that was originally adopted after the 2009 deadline. Specifically, the letter requests that “the plan sponsor should not be required to submit a separate VCP for operational errors stemming from the untimely plan adoption, and there should be no requirement to correct operational violations for failing to operate the plan in accordance with the terms of that untimely adopted document, where a correcting document is part of the VCP submission.”

The full text of the letter submitted to the IRS can found here.