The §403(b) Written Plan Requirements – Can they be Satisfied with Existing Documents?

April 1, 2008 ((b)lines) - In July 2007, the IRS issued final regulations on tax-sheltered annuity plans under IRC §403(b) as the first comprehensive guidance for §403(b) plans in more than 40 years. One of the major changes in the regulations requires that §403(b) plans be maintained pursuant to a written plan adopted by the plan sponsor, effective January 1, 2009.

The actual text of the regulations requires that the written plan contain all material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the timing and form of benefit distributions. In addition, any optional plan features (e.g., hardships or loans) offered under the plan must be described in writing, as well as how responsibility for performing administrative functions is allocated between appropriate parties. The regulations also state that the written plan may incorporate other documents by reference, including the annuity contract or custodial account agreement.

This last statement has many §403(b) plan sponsors wondering whether they can satisfy the written plan requirements with documents that already exist. The preamble to the final regulations provides some explanation on this point. Preamble language clearly indicates that while an annuity contract may contain terms describing the compliance requirements under the regulations and may provide that the issuer will be responsible for many of the administrative functions under the plan, such document cannot satisfy the function of setting eligibility criteria for employees and cannot coordinate compliance requirements that depend on other contracts (e.g., limitations on loan amounts). Thus, the annuity contract, by itself, will not satisfy the written plan requirements.

Still, the IRS was careful to specify that a “written plan” is required and not necessarily a single “plan document,” which means that the plan may consist of multiple documents. Therefore, a plan sponsor could, for example, satisfy the written plan requirements using existing documents (such as annuity contracts) combined with written provisions that describe who is eligible to participate in the §403(b) plan, as well as how compliance requirements are coordinated among multiple issuers (if applicable). The preamble cautions that if the plan consists of multiple documents, there must not be conflicting provisions in those documents. In addition, the preamble states that if the plan has multiple issuers, then the IRS expects a single plan document to coordinate plan administration, rather than a separate document for each issuer.

Finally, the IRS published model plan language, specifically for public school employers, on November 27, 2007. However, while the model plan language includes provisions that would satisfy all compliance requirements for §403(b) plans, the plan sponsor will still need additional language describing the specifics of their plan. This language should include who is eligible to participate, who is responsible for various administrative functions, and the names of issuers who are permitted to accept contributions and/or contract exchanges on behalf of employees.

Melanie Walker, JD, Vice President and West Region Compliance Practice Leader, The Segal Company