IRS Issues Procedures for Pre-Approved 403(b) Plans


By Mary K. Samsa, Todd A. Solomon and Joseph K. Urwitz, © McDermott Will & Emery LLP April 26, 2013

In April 2013, the Internal Revenue Service released Revenue Procedure 2013-22, which articulates procedures for vendors sponsoring pre-approved section 403(b) defined contribution plans to secure a pre-approved opinion or advisory letter. The IRS will start accepting applications for these favorable opinions on June 28, 2013.

The revenue procedure will be used by section 403(b) plan vendors seeking to secure a favorable opinion letter on any "prototype" or "volume submitter" section 403(b) plan they offer to clients. Nonprofit organizations sponsoring section 403(b) plans will not seek their own opinion or advisory letter on their individually designed plans as that is not the purpose of this revenue procedure and the IRS has yet to issue procedures on how to secure a favorable determination letter for an individually designed Section 403(b) plan.

Note that any section 403(b) plan in existence today is an individually designed plan. Nonprofit organizations that purchased “model” section 403(b) plans from vendors in the past still have individually designed plans because, prior to the revenue procedure, there was no legal mechanism under which a vendor could offer a prototype section 403(b) plan.

Additionally, any service agreement that an organization has with a section 403(b) plan vendor more likely than not contains language stating that the organization needed to have the “model” plan reviewed by counsel for legal compliance. As such, responsibility for the legal upkeep of any section 403(b) plan has always been on the plan sponsor. Although most vendors have done a good job of keeping these “model” plans up to date for law changes, technically they were not responsible for “maintaining” these plans (since they were not true prototype plans) on an ongoing basis.

However, because section 403(b) plan vendors can now submit their “model” section 403(b) plans to the IRS for favorable opinion letters on their compliance with final section 403(b) regulations, it’s anticipated that any organizations currently using a “model” section 403(b) plan eventually will be approached by their vendor to migrate to any pre-approved section 403(b) plan on which it is successful in securing an opinion letter on from the IRS. Organizations are not required to change, but may want to explore this option (particularly if the pre-approved plan more or less mirrors their existing plan), because the organization can then shift responsibility for the legal upkeep of the section 403(b) plan to the vendor and have the added protection of being covered by a favorable IRS opinion.

On the other hand, if the organization’s section 403(b) plan is complex (e.g., has different matching contribution for different groups within the controlled group), it may not squarely fit within the pre-approved plan and may need to remain an individually designed plan.

Retroactive Corrections

The revenue procedure includes a remedial amendment provision that allows sponsors adopting the approved plan to retroactively correct any section 403(b) plan document failure by timely adopting the pre-approved plan. This particular provision meshes with the recent 403(b) Fix-It Guide on fixing section 403(b) plan failures released by the IRS on Feb. 21, 2013.

As IRS procedures are refined for reviewing and approving section 403(b) plans, the IRS is providing multiple avenues for assisting 403(b) plan sponsors in meeting these new compliance objectives.

The revenue procedure does not permit individually designed plans to obtain determination letters. However, the IRS may establish a program permitting this in the near future. 401(k) plan sponsors have long been able to receive IRS “blessing” for their individually designed plans, and 403(b) regulations and IRS guidance over the past half-decade has resulted in 403(b) plans becoming more similar to 401(k) plans.

For example, beginning in 2009, 403(b) plans were required to written, as was (and is) true for 401(k)s—no written plan requirement existed beforehand for 403(b)s.In that year, 403(b) plans became subject to annual audit and IRS/DOL reporting requirements on Forms 5500 similar to those imposed on 401(k)s (requiring disclosure of plan assets, plan distributions and the number of plan participants, among other information). Earlier this year, the IRS instituted a program expanding the ability of 403(b) plan sponsors to “fix” plan mistakes, bringing the correction procedures for 403(b) plan sponsors more in line with those available for 401(k) plan sponsors.

Because the IRS has been active in developing guidance under which 403(b) plans and 401(k) plans are subject to similar rules, a program allowing 403(b) plan sponsors to receive determination letters may not be far off.

Mary K. Samsa and Todd A. Solomon are partners in the law firm of McDermott Will & Emery LLP and are based in the firm’s Chicago office. Joseph K. Urwitz is an associate based in the firm’s Boston office. © 2013 Dermott Will & Emery LLP. All rights reserved. Republished with permission.

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