1/15/2013

Introduction

On December 31, 2012, the IRS released a long awaited update to the Employee Plans Compliance Resolution System (EPCRS) with Revenue Procedure 2013-12. One of the most comprehensive updates of the release was to include guidance on fixing 403(b) written plan failures.* The prior EPCRS rules, under Revenue Procedure 2008-50, applied to 403(b) plans but did not include procedures to fix 403(b) written plan document failures and failures to operate a plan according to its terms. 403(b) plans can use either set of guidance to fix operational, demographic and employer eligibility failures: Revenue Procedure 2008-50 applies to 403(b) failures that occurred in taxable years beginning before January 1, 2009 and Revenue Procedure 2013-12 applies to failures on or after January 1, 2009.

Revenue Procedure 2013-12 provides a relatively short window to take advantage of a reduced fee to fix 403(b) written plan document failures (the reduced fee expires after December 31, 2013). Below, we will discuss the background and details of the written plan requirement and the fees and due dates under the new EPCRS for correcting written plan requirement failures. Most plans are still waiting for the opportunity to fix written plan failures that occurred on or after January 1, 2010 as will be explained in more detail below. Finally, the last section of the article will address some frequently asked questions about the EPCRS process.

403(b) Written Plan Requirement

Background

The final 403(b) regulations originally provided that all 403(b) plans had to comply with the new written plan requirement by January 1, 2009. The deadline was extended to 12/31/2009 by Notice 2009-3. For plans in existence on or prior to December 31, 2009, there is a document failure if a written plan was not in existence by that date.

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 under Announcement 2009-89. The remedial amendment period allows sponsors to retroactively fix a written plan failure back to January 1, 2010. There is currently no end date established for this remedial amendment period. In order to be eligible for the relief under Announcement 2009-89 a number of requirements must be met:

• For plans in existence on or prior to December 31, 2009:
• A written plan. This requirement can be met in a few ways:
  1. written plan actually adopted on or before December 31, 2009, or
  2. a VCP compliance statement or
  3. an Audit CAP closing agreement for the failure to adopt a written 403(b) Plan timely must have been obtained by the plan sponsor;
• During 2009, the plan was operated in accordance with a reasonable interpretation of 403(b) and the regulation; and
• On or before 12/31/2009 best efforts were made to retroactively correct operational failures during 2009 to conform to the written plan
• Plan sponsor must adopt a pre-approved plan once made available - or - seek an individual determination letter once the process is available

The remedial amendment period will end once the deadline to seek a determination letter or restate to a pre-approved plan has passed. Currently, there are no final revenue procedures for the pre-approval process and/or determination letter process (Announcement 2009-34 describes draft procedures). Once final procedures are announced, it will likely be at least a few years before pre-approved plans are available in the marketplace. Please note that the remedial amendment period only addresses written plan failures. It does not provide an extension of time to fix other failures like failure to follow the written plan, operational, demographic and employer eligibility failures. These failures should be analyzed and addressed by EPCRS.

Finally, a few items to note about the written plan requirement:

• If the plan was subject to ERISA, ERISA separately had a written plan requirement well prior to 2009.
• Certain churches (defined in Code section 3121(A) or (B)) are not required to have a written document as long as those plans invest only in custodial contracts and/or annuities. Church plans that invest in the more flexible retirement income accounts, are required to have a written plan.

What is Required to Have a Written Plan?

When thinking of the written plan requirement, many might think of Bob Architect (formerly of the IRS and a primary drafter of the 403(b) regulations) and can hear him talking about a "giant paper clip". He was emphasizing that plan sponsors can incorporate other documents by reference, as is discussed in the preamble and the regulations themselves. But the regulations do say quite a bit more than that. Here's a shortened version of what the regulations require with some emphasis added:

[T]he plan must contain all 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. ... a plan may contain certain optional features that are consistent with but not required under section 403(b), such as hardship withdrawal distributions, loans, plan-to-plan or annuity contract-to-annuity contract transfers, and acceptance of rollovers to the plan. ... The plan may allocate responsibility for performing administrative functions ... and may incorporate by reference other documents, including the insurance policy or custodial account, which thereupon become part of the plan.

There's no IRS guidance to establish a "floor" of the bare minimum written plan requirements although IRS has issued a model written plan in Revenue Procedure 2007-71 and Announcement 2009-34, which discusses what the IRS is expecting for pre-approved plans in the yet-to-be-released pre-approval program.

The above makes clear that simply having a number of individual annuity contracts and/or custodial accounts paper clipped together will certainly not meet the requirements in the regulations. As to what exactly needs to be in a particular plan will depend on the circumstances of the plan -- and there is plenty of gray here. Many of the issues that arise likely will come out of a dance between what's written and actual plan operations: are the failures from a failure to follow the written terms of the plan or is the written plan insufficient?

For example, a very simple, deferral-only 403(b) plan made up mostly of individual annuity contracts and/or custodial accounts likely has a number of other documents that could be added to the paper clip besides just those individual contracts. If the plan sponsor sends out a description of the plan to all of its employees each year perhaps simply indicating how to contribute to the plan amongst the permitted vendors, there's certainly an argument that you are meeting the minimum requirements: the plan sponsor is deferring most of the administrative duties to the vendors and most of the actual terms (primarily terms of distributions) will be handled in each of those individual investment contracts. Providing the notice at least once per year will satisfy the universal availability rule and the notice is going out to all employees, which would indicate everyone is eligible. Would something more formal please the IRS? Very likely, yes.

Perhaps weighed against the fees described below and the limited window for the reduced fees, plan sponsors will be motivated to have certainty and can move forward knowing their plan will not be subject to the potentially much greater fees that would arise under an audit for a written plan failure.

Deadlines and Fees

The primary 403(b) written plan failure that can be fixed under the current EPCRS is the lack of a written plan on December 31, 2009. If a plan came into existence on or after 1/1/2010 and lacks a written plan, it generally should not use EPCRS because the current remedial amendment period under Announcement 2009-89 allows most plan sponsors to fix written plan errors without EPCRS back to 1/1/2010 as was explained in more detail above.

The deadline to fix this error under a reduced fee exists for a limited time. Buried in section 12.02(5) (page 69), Revenue Procedure 2013-12 indicates 403(b) plans must submit an application no later than December 31, 2013 to be eligible for the reduced fee (detailed in the chart below). Since no applications can be made under the new EPCRS procedures until the new Forms 8950 and 8951 are finalized, the actual window to submit these filings will depend upon when those forms are released.

Frequently Asked Questions

What is a "Plan Document Failure"? As defined in Revenue Procedure 2013-12, section 5.02(2)(a), specific to 403(b) plans:

The term "Plan Document Failure" means a plan provision (or the absence of a plan provision) that, on its face, violates the requirements of section 403(b). Thus, for example, the failure of a plan to be adopted in written form or to be amended to reflect a new requirement within the plan's applicable remedial amendment period is a Plan Document Failure. If a plan has not been timely or properly amended during an applicable remedial amendment period with respect to provisions required to maintain the status of the plan under section 403(b), the plan has a Plan Document Failure. For purposes of this revenue procedure, a Plan Document Failure includes any 403(b) failure that adversely affects the status of the plan under section 403(b) and that is not an Operational Failure, Demographic Failure, or Employer Eligibility Failure.

Note that this article uses the term "written plan failure" to mean the same as "plan document failure".

If I submit a plan under VCP for a plan document failure, can that lead to a full audit? Am I just asking for trouble? Revenue Procedure 2013-12, section 10.02 provides "VCP is not based upon an examination of the plan by the Service. Only the failures raised by the Plan Sponsor or failures identified by the Service in processing the submission are addressed under VCP, and only those failures are covered by a VCP compliance statement. The Service will not make any investigation or finding under VCP concerning whether there are failures." Note, however, the very next section states that VCP also does not "preclude or impede a subsequent examination of the Plan Sponsor or the plan by the Service with respect to the taxable year (or years) involved with respect to matters that are outside the compliance statement."

What if we have some additional operational failures for the 403(b) plan over the past few years?

You can add additional failures to your VCP filing. Note that the reduced fee for VCP filing described above will not apply. In order to qualify for the reduced fee, the sole failure must be the failure to timely adopt a written plan.

* Other updates include the introduction of two new forms - the Form 8950 is to be used in any application for the Voluntary Correction Program (VCP) and Form 8951 is used to determine the applicable fee - as well as numerous clarifications and updates for law/guidance changes (Code section 436 updates for DB plans and new determination letter procedures, for example).

If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.

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