5/9/2013
Introduction
The IRS published Revenue Procedure 2013-22 on April 29, 2013 setting forth the procedures for issuing opinion and advisory letters for 403(b) pre-approved plans (pre-approval program). At this time, no pre-approved 403(b) plans exist and it will likely be at least a few years before any pre-approved plans are available in the marketplace. This article provides the background of events leading up to the pre-approval program, answers frequently asked questions about the new program and defines some terms used in the 403(b) and 401(a) pre-approval programs.
Background
403(b) plans have been on a bit of a wild ride the past few years. Final regulations were issued September 4, 2007. These regulations made several changes to the 403(b) rules; including adding the requirement that 403(b) plans be maintained on "written plan".In 2009 the IRS indicated it was planning to establish a pre-approved and individually designed program for 403(b) plans in order for sponsors to "obtain assurance that the written form of its plan satisfies section 403(b)". The deadline to adopt a written plan was also extended at this time to 12/31/2009.
Two days before the written plan deadline, IRS announced a "Remedial Amendment Period and Reliance for Section 403(b) Plans". The announcement essentially provides that if a written plan was in existence as of December 31, 2009 (or the plan was not yet in existence as of that date) then that plan is likely eligible for a remedial amendment period. The remedial amendment period allows sponsors to retroactively fix a written plan failure back to January 1, 2010. There is still currently no end date established for this remedial amendment period. The remedial amendment period will end once the deadline passes to restate a 403(b) document onto a preapproved plan. For additional details, see our article Limited Time to Fix 403(b) Written Plan Failure for Reduced Fee.
The IRS published Revenue Procedure 2013-22 on April 29, 2013 setting forth the procedures for issuing opinion and advisory letters for 403(b) pre-approved plans. The IRS indicated it was "not establishing a determination letter program for section 403(b) at this time and an employer who adopts a pre-approved § 403(b) plan will not be able to apply for an individual determination letter for the plan." The remainder of this article will attempt to explain some frequently asked questions now that Revenue Procedure 2013-22 has been issued.
Note that the terminology used throughout the FAQs are addressed at the end.
FAQs
What do I do now?
The short answer is that there is not much to do right now (unless you want to draft a 403(b) document for pre-approval). If you have certain language you want in your pre-approved plan, you could contact your document provider to ensure they are considering adding such language.
When can I restate my 403(b) plans to a pre-approved plan?
It is very hard to predict when pre-approved plans will be available in the marketplace. We expect it will be at least a few years until plans are approved by IRS (all mass submitter plans are typically approved on the same day). That approval opens the window for restatements.
The applications for pre-approval currently open June 28, 2013 and are due April 30, 2014.
Will ftwilliam.com offer pre-approved 403(b) plans?
Yes. Just as with our pre-approved 401(a) plans, you will be able to use our software to batch restate existing plans to the new language.
Once plans are approved, what's the deadline to restate?
Once documents are approved, the restatement window will be "in excess of one year".
Once my plans are restated, will I have to restate every 6 years?
The Revenue Procedure provides "[t]he Service expects future guidance to require the restatement of every section 403(b) pre-approved plan by the pre-approved plan sponsor every six years".
So how is this process different from that of pre-approved 401(a) plans?
In general the process appears to be very similar. Both programs provide for standardized prototype plans, non-standardized prototype plans and volume submitter plans and the structure of each is very similar to that in the 401(a) program. Some interesting differences include:
- Investment Language Override. The 403(b) program requires the pre-approved plan to include language overriding any conflicting language in an investment arrangement. Most 401(a) plans, in contrast, are funded via trust agreements that are pre-approved to work with particular pre-approved documents (trust language is submitted to IRS for approval separately).
- Administrative and Funding Appendix. The 403(b) program requires the pre-approved plan to include an appendix to the plan that lists all the vendors of investment arrangements approved for use under the plan that also identifies the parties responsible for "various administrative functions... to comply with the requirements of 403(b) and other tax requirements". Changes to the information in the required appendix will not affect the employer's ability to rely on an opinion or advisory letter. The 401(a) program has no such required appendix. It handles a somewhat similar problem in a different way: each plan typically identifies the Plan Administrator, Investment Fiduciary and Trustee. The duties of each are typically based on ERISA.
- Governmental Plans Combined with Non-Governmental Plans. The 401(a) program for the upcoming cycle Revenue Procedure 2011-49 requires governmental plans to have a separate basic plan document - no such requirement exists for the 403(b) program. A 403(b) pre-approved plan can be drafted to include nonprofits, churches and public schools on one document (where a different arrangement of ERISA and nondiscrimination rules will typically apply to each). A 403(b) pre-approved plan that is a retirement investment account (allows more flexible investment options for certain churches), however, must use a separate sepcimen plan.
- Role of the Pre-approved Plan Sponsor. The 403(b) pre-approval program appears to rely on the pre-approval plan sponsor to provide guidance and assistance to employers with a bit more emphasis than under the 401(a) program. (Note that sponsors can be mass submitters or customers of a mass submitter that choose to obtain their own letter as a word-for-word adopter.) At the volume submitter level in the 401(a) program, the plan may provide the practitioner will the power to amend the plan on behalf of an employer to update the plan for changes in law (generally, annual interim amendments). In the 403(b) program, all pre-approved plans must provide the practitioner/sponsor with this authority.
An employer that adopts a § 403(b) volume submitter plan may modify the terms of the approved specimen volume submitter plan, in addition to selecting among options under the plan, without causing the employer's plan to be treated as an individually designed plan, provided the employer's plan is "substantially similar," within the meaning of section 7.01 of this revenue procedure, to the approved specimen plan.
Terminology
Note that the terms are defined in logical and not alphabetical order.
Opinion Letter. An opinion letter is a pre-approval letter for a prototype plan. Document drafters and mass submitters typically obtain an opinion letter for their plans. Customers of a mass submitter can apply for an opinion letter in their name for the same document (word-for-word adopters).
Sponsor. A sponsor is the holder of an opinion letter. The 403(b) program uses the term "advisory letter" but does not appear to use the term "advisor" and instead appears to use "sponsor" to encompass both advisors and sponsors (i.e. the holder of a pre-approval letter).
Advisory Letter. An advisory letter is a pre-approval letter for a volume submitter plan. Document drafters and mass submitters typically obtain an opinion letter for their plans. Customers of a mass submitter can apply for an opinion letter in their name for the same document (word-for-word adopters).
Advisor. An advisor is the holder of an advisory letter. The 403(b) program uses the term "advisory letter" but does not appear to use the term "advisor" and instead appears to use "sponsor" to encompass both advisors and sponsors (i.e. the holder of a pre-approval letter).
Mass Submitter. A mass submitter, under Revenue Procedure 2013-22, is a document provider that has at least 30 prototype sponsors and/or 30 volume submitters that wish to adopt its plans on a word-for-word identical basis.
Determination Letter. An IRS approval letter for a plan after it has been drafted for a particular employer (filed on a Form 5307 or 5300). Determination letters do not exist for 403(b) plans. The IRS is generally limiting the amount of determination letters. Prototype 401(a) plans can no longer seek a determination letter unless he document has been modified in a way that made the plan individually designed.
Prototype plan. This is a pre-approved plan that must be drafted with an adoption agreement (where various options are selected) and a basic plan document. Any changes to the document (beyond the selection of pre-approved options and modifications of the appendix listing duties of parties and approved vendors) results in the document becoming individually designed and losing its pre-approved status. For example, modifying a sentence in the basic plan document to read better or clearer would be a modification that would make the document individually designed.
Standardized prototype plan. A standardized prototype will have more limited options to exclude employees (only employees described under Treasury Reg section 1.410(b)-6 may be excluded), define compensation for allocation purposes (must use total compensation under 415 or Treasury Reg section 1.414(s)–1(c)), and select non-elective contribution formulas (must satisfy one of the design-based safe harbors described in Treasury Reg section 1.401(a)(4)–2(b)(2)). In general, a standardized plan will be simpler to administer from a nondiscrimination stand-point (assuming 401(a)(4) and coverage apply to the sponsoring employer).
Non-standardized prototype plan. A non-standardized prototype plan is a prototype plan that is not a standardized prototype. This means the general prototype rules apply (modifications will make the plan individually designed, for example) but the restrictions on options described above will not apply.
Volume submitter plan. This is a pre-approved plan with a few basic differences from prototypes: 1) more flexible format options - volume submitter plans may be drafted with an adoption agreement (where various options are selected) and a basic plan document or the plan may be in the more traditional/custom format (as features are selected, paragraphs will appear and/or disappear from the plan document); 2) modifications of the pre-approved volume submitter language will not make the volume submitter individually designed - as long as the changed plan is "substantially similar" to the approved specimen plan.
If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.