That Relief on the 403(b) Written Plan – It May be Better than You Thought

February 17, 2009 (PLANSPONSOR (b)lines) - In a Webcast sponsored by the Southeastern Association of School Business Officials, with support from VALIC, Robert J. Architect, Senior Tax Law Specialist, Internal Revenue Service, cleared up some confusion about the IRS' relief on the written plan document requirement for 403(b) plans - and it is good news for sponsors.

Notice 2009-3 (see IRS Offers Relief on 403(b) Written Plan Requirement ) says the IRS will treat plans as meeting the requirements of 403(b) and the regulations during the 2009 calendar year if:

  • By December 31, 2009, the plan sponsor has adopted a written 403(b) plan that is intended to satisfy the requirements of 403(b) (including the final regulations) effective as of January 1, 2009;
  • During 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of 403(b) and the related regulations; and
  • By the end of 2009, the plan sponsor makes its best effort to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written plan.

Architect told Webcast attendees, this does not mean the adopted plan has to be effective as of January 1, 2009 or that sponsors have to correct back to January 1, 2009 operations in contrast to the terms of the plan. Rather, the language of the Notice means plans must satisfy the regulations that were in effect as of January 1, 2009, and sponsors must correct operations in contrast to the terms of the plan as of the plan’s effective date.

Architect assured attendees that the IRS would not cite sponsors for a form failure for having no document or amendment in place during the period from January 1, 2009 until the effective date of their adopted plan.

That noise you hear? It is the collective sigh of relief from those who had interpreted the language of the Notice differently.

Despite this clarification on the written plan relief, Richard Turner, Vice President and Deputy General Counsel, VALIC, encouraged Webcast attendees not to wait too long to adopt their written plan document.

Architect agreed. While the IRS relief on the written plan document requirement deadline provided much needed time for school districts and other plan sponsors to get through the bureaucracy of getting their written plan approved, for plan sponsors without the same approval hierarchy, the sooner the plan is in place the better.

That's because, while the clarification on relief may mean fewer corrections than once thought, some corrections will still be inevitable, especially in cases where the person(s) handling day-to-day operations of the plan may not be privy to all the actions of those responsible for deciding plan terms and approving the plan.

Document or not, the final regulations are in effect, so Turner pointed out that clearly, as of January 1, 2009, sponsors would have to correct any operations that were not consistent with the regulations, including contributions made in excess of statutory limits, contributions not made for employees who should have been allowed to participate, and impermissible distributions. However, to conform to their written plan, sponsors may find themselves with other more arduous corrections to make.

Turner provides as an example that without the guidance of a written plan, sponsors could be operating the plan in accordance with the Code and the 403(b) regulations, and they allow for a $3,000 catch-up contribution for employees with 15 or more years of service. However, the catch-up contribution is an elective feature for plans, and if the catch-up is not adopted with the written plan, but followed prior to the plan effective date, sponsors would have to return the excess contribution, making the amount taxable to participants.

Likewise, the Code allows for participants with smaller balances to take a loan of $10,000 or 50% of their account balance, whichever is greater. If the adopted plan only allows for loans of 50% of participants' account balances, sponsors would have to make taxable that part of loans made prior to the plan effective date that exceeded this limit, Turner pointed out.

Sponsors that do not want to be subject to the administrative burdens of such corrections - or that do not want to raise the ire of plan participants - and that are already sure of which provisions they will offer in their plans, would be better off getting their plan in place now.

Turner added that many sponsors that do not have a document in place may be using as a guide provisions of annuity contracts and/or custodial agreements, and coordinating information among approved providers or requiring that they coordinate among each other. If the plan they adopt assigns a central coordinator or limits transactions such as loans or hardship withdrawals to one provider, the easiest thing to do is to put both sets of procedures in the plan, Turner said. For example, the plan may say that prior to July 1 participants may take a loan from all provider accounts up to the plan limit, but after July 1 loans may only be taken from accounts with Provider A.

During the Webcast, Architect said that, when issuing Notice 2009-3, the IRS recognized that many plan sponsors were not ready with written plan documents and that the regulations did not provide for a remedial amendment period and there was no pre-approved prototype or determination letter program.

Architect assured sponsors that a pre-approved prototype plan program is still coming as promised last year (see IRS Developing Pre-approved Plan Program for 403(b)s ). He said that within a month or two the IRS will draft a revenue procedure for the program it hopes to open up in summer of 2009. The revenue procedure will be an instruction booklet for entities that want to submit a prototype document for approval, according to Architect.

Included in the revenue procedure will be draft sample plan language, available on the IRS Web site, and the revenue procedure will go beyond Rev. Proc. 2007-71 in that it will address matching contributions and Roth contributions, Architect said.   There will be a comment period for sponsors and industry providers to present their issues.

Meanwhile, Architect pointed plan sponsors to Rev. Proc. 2007-71 (see IRS Offers Model 403(b) Plan Language for Public Schools ) to answer questions such as how to issue loans to former participants without disqualifying the plan and what in-service withdrawals are permitted.

Finally, Architect warned plan sponsors that the provision of Rev. Proc. 2007-71 that says contracts issued before 2009 as part of an employer's plan are considered to be part of the written plan if the employer makes a reasonable, good faith effort to establish information sharing agreements with the orphaned provider is not delayed, and ended December 31, 2008. Turner advised that sponsors include in ISAs with current approved providers a provision that, as long as plan assets are held with the provider, it must continue to share information, even if later deselected.