IRS Announces 403(b) Prototype Program: What Employers Need to KnowMay 21, 2009
On April 14, 2009, the Internal Revenue Service (the "IRS") issued Announcement 2009-34, which contains its proposed revenue procedure that will establish an opinion letter program for Section 403(b) prototype plans. Simultaneous with the Announcement, the IRS posted sample plan language for use in drafting such prototype plans on its Web site. The IRS has requested comments on the proposed revenue procedure and prototype plan language by June 1, 2009.
A tax-sheltered annuity plan under Section 403(b) of the Internal Revenue Code (the "Code") is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations (i.e., organizations subject to Section 501(c)(3) of the Code) and certain church employees and ministers ("Section 403(b) plan"). Individual accounts in a Section 403(b) plan can be any of the following three types: (i) an annuity contract, which is a contract provided through an insurance company, (ii) a custodial account, which is an account generally invested in mutual funds, or (iii) a retirement income account set up for church employees. The annuity contracts and custodial accounts may be funded by employee salary deferrals, employer contributions, or both. Although Section 403(b) plans are not subject to the qualification requirements of Section 401 of the Code, certain requirements that apply to Section 403(b) plans are similar to those that apply to qualified retirement plans. For example, employer contributions and certain elective deferrals made to a Section 403(b) plan are only excluded from a participant's gross income if certain universal availability, nondiscrimination, and distribution requirements are satisfied.
Prototype Plans Generally
A prototype plan is a retirement plan prepared by an institution known as a "prototype sponsor" that may be adopted by one or more employers. IRS-approved prototype plans only have been available for qualified retirement plans (i.e., defined benefit pension plans and Section 401(k) plans) but not for Section 403(b) plans. Generally, prototype sponsors have included banks, securities firms, or other financial institutions. Each prototype plan consists of two key documents: a basic plan document and an adoption agreement. The basic plan document contains the provisions of the plan that apply to all adopting employers. The adoption agreement contains certain plan provisions that adopting employers may elect to apply to their plan participants.
The prototype sponsor generally submits a request to the IRS to review the basic plan document and adoption agreement form to determine whether the prototype plan form complies with the various tax-qualification requirements. If the IRS determines that the form of the documents is in compliance, it will issue a favorable opinion letter to the prototype sponsor. If an employer adopts the standardized adoption agreement that accompanies the basic plan document, the employer may rely on the opinion letter received by the prototype sponsor with respect to the plan's qualification as to form. If the employer adopts a non-standardized adoption agreement that accompanies the basic plan document or the employer makes individual amendments to the non-standardized adoption agreement, the employer may not be able to rely on the opinion letter that the prototype sponsor received from the IRS regarding the basic plan document (and will typically need to apply for its own individual determination letter from the IRS).
The final treasury regulations applicable to Section 403(b) plans (the "2007 Regulations") require that, among other things, employers that sponsor Section 403(b) plans maintain a written plan document by December 31, 2009. In order to promote compliance with the 2007 Regulations, the IRS will establish an opinion letter program for Section 403(b) prototype plans. Announcement 2009-34 provides a proposed revenue procedure to establish this opinion letter program as well as a description of provisions required to be included in every Section 403(b) prototype plan. The rules and procedures, as set forth in the proposed revenue procedure, will generally be similar to those that apply to prototype plans for qualified plans. Employers who adopt an IRS-approved prototype Section 403(b) plan will generally be assured that the form of plan meets the requirements under Section 403(b) and the 2007 Regulations and will generally be able to rely on the prototype plan's opinion letter and will not need to request an individual determination letter.
Under the proposed rules, similar to qualified retirement plans, there will be two types of prototype Section 403(b) plans: a "standardized plan" and a "nonstandardized plan." A standardized Section 403(b) plan will provide for employee elective deferrals only, or employer contributions that automatically satisfy the uniform coverage and contribution rules. A plan that does not qualify as a standardized plan is considered a nonstandardized plan. Employers who adopt nonstandardized plans can generally rely on the opinion letter for the prototype plan except with respect to whether the plan satisfies the coverage and contribution discrimination rules. Such employers may request an individual determination letter (once the IRS begins the process of accepting such requests) if they wish to receive a ruling from the IRS that the plan meets the nondiscrimination requirements.
Effect on Employers
While the proposed revenue procedure is mostly aimed at financial institutions that will be creating 403(b) prototype programs, several items raised by the IRS will impact employers that maintain Section 403(b) plans. First, in order to receive transitional relief for 2009, employers must (i) operate their Section 403(b) plans in compliance with the 2007 Regulations, and (ii) adopt a written plan document by December 31, 2009.
Second, for calendar years after 2009, the IRS plans to provide a "remedial amendment period" that will allow employers to retroactively correct provisions in their Section 403(b) plan documents which do not conform to IRS guidance by (i) timely adopting an IRS-approved prototype Section 403(b) plan document, or (ii) timely amending an individually designed plan document and submitting a request for an IRS determination letter (once the IRS makes a Section 403(b) plan determination letter program available to employers).