403(b) Updates
Rev. 12/12/08; E-mail Alert 2008-16

BREAKING NEWS - AS WE FINALIZED THIS ALERT
Late yesterday the IRS issued Notice 2009-3 in which the deadline for adopting a written plan for a 403(b) was changed to December 31, 2009, provided the 403(b) plan operates under the final 403(b) regulations for the 2009 calendar year and adopts a written plan effective as of January 1, 2009 by December 31, 2009. Click here for IRS Information Release 2008-140. The deadline relief in Notice 2009-3 follows:

"Relief for 2009

The Service will not treat a §403(b) plan as failing to satisfy the requirements of
§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 has adopted a written
§403(b) plan that is intended to satisfy the requirements of §403(b) (including the final
regulations) effective as of January 1, 2009;

(2) during 2009, the sponsor operates the plan in accordance with a reasonable
interpretation of § 403(b), taking into account the final regulations; and

(3) before the end of 2009, the sponsor makes 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 correction to be based on the general principles of correction set forth in the Service’s Employee Plans Compliance Resolution System (EPCRS) at section 6 of Rev. Proc. 2008-50 (2008-35 I.R.B. 464).

The relief under this notice 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."

The following article was set for release today, prior to yesterday's IRS information release.

As recently as last week, in an IRS teleconference on 403(b) Plans, Robert Architect of the IRS, discussed the status of the 403(b) written plan document general effective date of January 1, 2009 and thus the general deadline for adopting a written 403(b) plan by December 31, 2008. Mr. Architect stated that the IRS has received comments regarding an effective date delay, a good-faith standard, and a remedial amendment approach for the 403(b) written plan.

Other information from the IRS Teleconference

He further stated that there is no remedial amendment period for a 403(b) plan and thus, no retroactive amendment or adoption of a 403(b) plan. However, the IRS intends to respond to comments in form as yet unknown. We were advised to stay tuned and watch the IRS web site upon which a response to the comments would be made in the next two to three weeks. Well, the release of the postponed deadline came only one week later.

MHCO Comment: Prior to this teleconference, McKay Hochman had asked the IRS to provide clarification of the ability of an ERISA 403(b) plan to utilize the universal availability exclusion for employees who work less than 20 hours a week, provided there is language in the document to explain that if an employee works 1,000 hours in a 12 month period they may not be excluded. We hope IRS will address this request for a clarification in either the 403(b) prototype plan LRMs which are due out soon or in the response to comments referenced above.

Control group rules
There was an additional tax item for the tax-exempt community to take note of in the final 403(b) regulations of July 24, 2007.  Section 1.414(c)(5) of the Regulations for the first time let’s the IRS deal with controlled group in a tax-exempt entity as of January 1, 2009. Who the employer is for a 501(c)(3) and all tax-exempt organizations for all benefit purposes, such as health insurance and group life insurance, was noted as an extremely important item and that tax-exempt organizations should take careful note.

403(b) DOCUMENT PROGRAMS

Public School Model Document
RP 2007-71 included model 403(b) document language that will provide reliance for public school entities. It also contains sample language for other schools.  However, it has no provisions for Roth deferrals, matching contributions or employer nonelective contributions.  The IRS will not be updating and supplementing RP 2007-71.

Prototype 403(b) Program
The IRS has been working on a preapproved program for 403(b) plans, similar to the prototype program for qualified plans. Under the forthcoming program, organizations who provide 403(b) plan services may prepare a prototype document and submit it for an Opinion Letter. One of the main issues of the final regulations is that a 403(b) plan must be maintained pursuant to a written plan document that satisfies the regulations as to form and operation. The 403(b) prototype will meet these requirements. As with qualified plan prototypes, employers may adopt 403(b) prototypes and have reliance that the form of plan meets the IRS requirements for a 403(b) plan. 

Between 65-70 pages of suggested language is being published for prototype program first. In the future an individually designed program is likely to follow. The LRMs will include Roth, tax-exempt organizations making matching and nonelective contributions. The IRS hopes to have the prototype plan program out to the public early in 2009.

In the next several weeks a proposed revenue procedure along with supporting LRMs will be issued. Then there will be a comment period of 45 days for both the LRM and the proposed revenue procedure.  Hopefully, this proposal will be issued before December 31, 2008.

Individually Designed 403(b) Determination Letter Program
Once the IRS has gained experience with the prototype, it anticipates opening a Determination Letter program for 403(b) plans so that an employer may apply for approval of an individually designed 403(b) plan.

EPCRS Correction Process
Mr. Architect stated that the IRS needs the final 403(b) regulations to be up and running before it can add the defects that may occur to the EPCRS. (Thus, they were not added to RP 2008-50.)

Other Topics

Adopting the 403(b) written plan document.
This is the first time a 403(b) must be maintained pursuant to a written plan document. As such, this is very, very new to many organizations. How do I evidence or show that I have one?  Adopting the plan, memorializing in writing, or putting into effect your plan, signing and adopting on a certain date. Mr. Architect stressed the importance that a written plan document be in place and memorialized by an Adoption Agreement.

Bad 403(b) plan terminations
Some organizations feel that by terminating the 403(b) they will not have to deal with the final regulations.  There are now favorable tax consequences if able to go down the path of termination. What is plan termination? A plan termination requires the timely distribution of all the 403(b) plan’s assets (within 12 months).

If it is not possible to do so, then you do not have a proper termination. If a plan has individual annuity and group annuity contracts then the employer is not in the position to terminate the plan. Because we are dealing with yesterday’s products and systems in a new world of regulations, the employer may have no power to have individuals make distributions. Termination is twofold, the first being logistically able to terminate and secondly following the regulations addressing the tax consequences of a termination. The regulations permit the distribution and rollover of the distributable amounts to an IRA. However, if even one person does not take their money out of the terminating 403(b) all the others that did receive a distribution will have a taxable event, even if the funds were rolled into an IRA.  RP 2007-71, Section 8.3(a) of the model plan language illustrates the point: subject to the individual agreements, you may be able to terminate the plan. If the termination is not appropriate, it would result in bad rollovers being taxable.

Bill Grossman, QPA