In Employee Plans News, June 8, 2012, Monika Templeman , Director of Employee Plans Examinations at the Internal Revenue Service (the "IRS"), discussed the temporary guidance that the IRS has given to examination agents auditing 403(b) plans for the 2009 plan year and forward.
She said that exam agents found themselves in limbo when starting these audits. The 403(b) final regulations require 403(b) plan sponsors to have a written plan in place starting January 1, 2009, and to follow the terms of their plan in operation.
Notice 2009-3 provided plan sponsors until December 31, 2009, to adopt a written 403(b) plan if they met the conditions outlined in the notice. In addition, the current Employee Plans Compliance Resolution System Revenue (the "EPCRS") Procedure 2008-50 doesn't offer relief for failing to comply with these new requirements. Therefore, the IRS developed temporary guidance for the exam agents' use until the IRS releases an updated EPCRS revenue procedure. If any 403(b) plan operational errors fall under the definitions of Revenue Procedure 2008-50, the agent works the examination under normal procedures.
Ms. Templeman continued by saying that, generally, if exam agents discover a failure to meet the requirements in Notice 2009-3, Ms. Templeman requested that they prepare an Audit Closing Agreement, but use a sanction closer to the fees that would be paid under the Voluntary Correction Program. The amount of the sanction depends on:
• How did the plan sponsor comply with the Notice 2009-3 requirements prior to being informed of the audit?
• Did the plan sponsor timely adopt the 403(b) written plan?
• Is the sponsor operating the plan according to the written plan requirements?
• Were there other failures?
Announcement 2009-89 provides a remedial amendment period for 403(b) plans that met the requirements of Notice 2009-3 or were new plans adopted after December 31, 2009. Generally, if the plan sponsor either adopts a pre-approved
prototype plan or applies for an individual determination letter, they have reliance that their document satisfies the 403(b) written plan requirements beginning on the later of January 1, 2010, or the plan's effective date. The plan sponsor must,
however, correct all form defects in the written plan retroactive to the applicable date.
If the plan falls under the remedial amendment period but has form defects, the agent will request an amendment to correct the form defect and help prevent operational defects. If the plan sponsor chooses not to make the amendment because its plan is in an open remedial amendment period, the agent will add the plan to a list for follow-up, which could be another examination.
A question that Ms. Templeman hears many times from plan sponsors is, "Should we wait to correct plan operational errors until the new EPCRS revenue procedure comes out?" She says that she always answers, "No. Correcting now goes a long way in showing good faith to fix your plan failures if the plan is audited." The agents and plan sponsors will follow the guidance of the new EPCRS revenue procedure when it is released. The IRS will also premier the new 403(b) Fix-It Guide on its website, which will assist the sponsor in finding, fixing, and avoiding the most common 403(b) plan errors.