4037 / What is the written plan requirement for 403(b) plans?

Editor’s Note: Beginning January 1, 2023, Revenue Procedure 2022-40 allows plan sponsors to submit determination letter applications for individually designed 403(b) plans with respect to initial plan determination, plan terminations, and other issues that the IRS has yet to announce.  Plans sponsored by schools, churches and tax-exempt organizations will be permitted to apply in substantially the same way that is already available for individually designed qualified plans.

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Planning Point: Plans are not required to participate in the determination program. However, the program allows the plan to receive assurance from the IRS that the plan’s written form complies with the Internal Revenue Code. Applying also makes it easier for the plan to correct any errors under the EPCRS program.

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According to final regulations, a contract does not satisfy the requirements for exclusion from gross income ( Q 4035) unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan that in both form and operation satisfies the requirements set forth in the regulations.¹ Thus, a plan must contain all of the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefit distributions would be made.²

A plan may contain optional features that are consistent with, but not required, under IRC Section 403(b), including features with respect to hardship withdrawal distributions, loans, plan-to-plan or annuity contract-to-annuity contract transfers, and acceptance of rollovers to the plan. If a plan contains any optional provisions, the optional provisions must meet, in both form and operation, the relevant requirements.³

A plan may allocate responsibility for performing administrative functions, including functions to comply with the requirements of Section 403(b) and other tax requirements. Any allocation must identify responsibility for compliance with the requirements of the IRC that apply on the basis of the aggregated contracts issued to a participant under a plan, including loans under IRC Section 72(p) and conditions for obtaining a hardship withdrawal. A plan is permitted to assign responsibilities to parties other than the eligible employer, but not to participants.⁴

The final regulations do not require that there be a single plan document.⁵ To satisfy the requirement that a plan include all material provisions, the regulations permit the plan to incorporate by reference other documents including the insurance policy or custodial account, which as a result then become part of the plan. Consequently, a plan may include a wide variety of documents, but it is important for the employer that adopts the plan to ensure that there is no conflict with other documents that are incorporated by reference.⁶

Notice 2009-3 provided relief from immediate compliance with the written plan requirement in calendar year 2009. Effective January 1, 2009, sponsors of 403(b) plans generally were required to maintain a written plan that satisfies, in both form and operation, the requirements of the final regulations. In response to numerous requests for deferral of the effective date, the IRS announced in Notice 2009-3 that it will not treat a 403(b) plan as failing to satisfy the requirements of IRC Section 403(b) and the final regulations during the 2009 calendar year, provided that, (1) on or before December 31, 2009, the sponsor of the plan had adopted a written 403(b) plan that was intended to satisfy the requirements of IRC Section 403(b), including the final regulations, effective as of January 1, 2009, (2) during 2009, the sponsor operated the plan in accordance with a reasonable interpretation of IRC Section 403(b), taking into account the final regulations, and (3) before the end of 2009, the sponsor made its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written 403(b) plan, with such corrections based on the general principles of correction set forth in the Employee Plans Compliance Resolution System “(EPCRS”).⁷ The IRS makes clear that the relief provided under Notice 2009-3 applies solely with respect to the 2009 calendar year and may not be relied on with respect to the operation of the plan or correction of operational defects in any prior or subsequent year.⁸

The IRS amended its EPCRS program to permit employers which have not timely adopted written plan documents under Notice 2009-3 to correct that error by submitting the document for approval of late adoption. This is done by filing under the Voluntary Compliance Program under the EPCRS, and paying a filing fee which specifically applies to nonadopters.

Remedial Amendment Period

The IRS has established an initial “Remedial Amendment Period” (“RAP”) for 403(b) plans related to changes imposed by the 2007 regulations.⁹ This remedial amendment period ran through March 31, 2020, under Revenue Procedure 2017-18. This deadline was delayed to June 30, 2020 in response to COVID-19.

The first day of this RAP is January 1, 2010 (though plan sponsors were permitted to amend their plans retroactively to January 1, 2009), and the last day of the period is June 30, 2020. The IRS has now approved the first pre-approved 403(b) prototype plans submitted under Revenue Procedure 2013-22, as extended by Revenue Procedure 2014-28, under Revenue Procedure 2017-18.

Any employer can also correct any plan document errors which occurred between
January 1, 2009 and June 30, 2020 by adopting one of these IRS pre-approved plans by that date.

Plan document errors made after the June 30, 2020 can be corrected in accordance with the EPCRS by making a filing under the Voluntary Compliance Program.

Model Plan Language

In 2007, the IRS issued Revenue Procedure 2007-71, which provides model plan language that may be used by public schools either to adopt a written plan to reflect the requirements of IRC Section 403(b) and Treasury regulations, or to amend a 403(b) plan to reflect the requirements of IRC Section 403(b) and Treasury regulations.¹⁰

The revenue procedure also provides rules for when plan amendments or a written plan are required to be adopted by public schools or other eligible employers to comply with final IRC Section 403(b) regulations.

In addition, the revenue procedure addresses the use of the model plan language by employers that are not public schools.

However, the model plan language is no longer effective after June 30, 2020, and any employer adopting such model plan must restate the plans to an IRS pre-approved document.

403(b) Prototype Plan Program

The IRS has issued a pre-approved plan program for 403(b) plans similar to the current programs offered for IRC Section 401(a) tax-qualified plans under Revenue Procedure 2013-22. The IRS is only intending to issue determination letters to these pre-approved plans, and will not issue determination letters on individually designed 403(b) plans.

The IRS program provides pre-approved documents for 403(b) retirement plans, which means that employers must restate their plans to reflect a new plan document by the end of a remedial amendment period (RAP) that ended June 30, 2020. Annuity contracts and custodial agreements must be updated, and the plan RMD requirements must be stated in the contracts themselves, rather than in the plan document. The employer must also complete an administrative appendix that will now be included with the IRS-approved plan documents.¹¹

Interaction between Title I of ERISA and IRC Section 403(b)

The Department of Labor is of the view that tax-exempt employers will be able to comply with the requirements in the new IRC Section 403(b) regulations and remain within the DOL’s safe harbor for TSA programs funded solely by salary deferrals. The DOL noted, however, that new IRC Section 403(b) regulations offer employers considerable flexibility in shaping the extent and nature of their involvement under a tax-sheltered annuity program. Thus, the question of whether any particular employer, in complying with the IRC Section 403(b) final regulations, has established a plan covered under Title I of ERISA must be analyzed on a case-by-case basis.¹²