Employee Benefits-News on 403(b) Plans: Compliance With Written Plan Requirement

In July of 2007, the IRS published comprehensive, revised regulations under Section 403(b) of the Internal Revenue Code.  These regulations are generally effective January 1, 2009. Among other matters, they require employers offering 403(b) plans to maintain the plans in writing. However, in Notice 2009-3, the IRS postponed the written plan requirement until December 31, 2009, and requires that, during 2009, employers operate their 403(b) plans in accordance with a reasonable interpretation of the Code, taking into account the revised regulations.

In Announcement 2009-34, issued April 14, 2009, the IRS said that it intends to establish a determination letter program for individually designed 403(b) plans, and an opinion letter program for prototype 403(b) plans. Receipt of a determination letter or opinion letter would generally mean that the plan or prototype satisfies the written plan requirements of the revised regulations. A “prototype”, in this case, is a plan which is created by a vendor (the ” prototype sponsor”) for adoption by an employer, and which consists of : a basic (unalterable) document which contains most of the plan’s provisions, and an adoption agreement which the employer completes to select certain optional rules. The Announcement included a draft revenue procedure containing the IRS’s proposed rules for issuing opinion letters for prototype 403(b) plans, and a statement that the IRS is posting draft sample plan language on its website for use in writing the prototypes. The Announcement requests comments from the public on these procedures and sample plan language. The Announcement does not affect the December 31 effective date of the written plan requirements or anything in Notice 2009-3. Also, the Announcement does not affect anything in Revenue Procedure 2007-71, which also has some model language for 403(b) plans.

So what does the Announcement mean for employers and prototype sponsors of 403(b) plans? It appears that an employer or prototype sponsor need not be concerned with incorporating the new sample plan language, referred to in the Announcement, into its plan or prototype, or for that matter have its plan or prototype covered by a determination or opinion letter, until the IRS finalizes this plan language and its determination/opinion letter procedures. Presumably, this sample plan language will be finalized prior to the December 31 effective date for the written plan requirement, affording employers and prototype sponsors sufficient opportunity to review and utilize the sample plan language. However, during the remainder of 2009, an employer should operate its plan under the reasonable interpretation standard of Notice 2009-3, taking into account the requirements of the revised 403(b) regulations. These requirements include the “universal availability” requirement, nondiscrimination requirements as to contributions, timing deadlines for remitting contributions, and rules for contract exchanges and plan-to-plan benefit transfers.

One curiosity. In the Announcement, the IRS requests that any entity which expects to file one or more opinion letter applications for a 403(b) prototype plan, either as a prototype plan sponsor or a mass submitter (each as defined, for this purpose, in section 7 of the draft revenue procedure), notify the IRS of the expected applications in writing, by June 1, 2009, at the address indicated in the Announcement. This notice should be provided separately from any comments the entity may have on the procedures or sample plan language contained in or referred to in the Announcement. A mass submitter should provide an estimate of how many opinion letter applications it will submit. It is not clear that any penalty attaches to the failure to notify the IRS of the expected filings, but potential opinion letter applicants should nevertheless consider complying with this request.

The IRS discusses Announcement 2009-34, and the proposed procedures for issuing opinion letters, in Employee Plans News, Special Edition, Spring 2009. See it here.