IRS Releases Proposed 403(b) Prototype Program and Sample Plan Language
May 12, 2009
Program is intended to help institutions meet the written plan requirement of the final 403(b) regulations
On April 14, 2009, in Announcement 2009-34, the IRS released a proposed revenue procedure (PDF) that would establish a prototype program for 403(b) plans. At the same time, the IRS issued proposed sample 403(b) plan language (PDF) that includes provisions for employer contributions, which can be used by both public and private employers. The IRS had previously issued a basic model plan in Revenue Procedure 2007-71, but that plan was designed primarily for use by governmental employers and did not include employer contributions provisions. These new pieces of proposed guidance establish a framework for a prototype program that parallels the current opinion letter program for master and prototype qualified 401(a) and 401(k) plans. TIAA currently is the sponsor of qualified 401(a) money purchase and 401(k) profit sharing prototype plans.
The proposed 403(b) prototype program is intended to help institutions meet the written plan requirement of the final 403(b) regulations by the December 31, 2009 deadline. (This deadline had been extended by the IRS late last year in Notice 2009-3 (PDF), which also stated that the IRS intended to establish a 403(b) prototype program.) The program will allow prototype plan sponsors, including service providers like TIAA-CREF, to obtain IRS approval of their 403(b) plans. This approval will give adopting employers the assurance that their 403(b) plan satisfies the requirements of the IRC and final 403(b) regulations. Of course, adopting employers will still have to operate their plans in accordance with these requirements.
The IRS has asked for written comments on the proposed program and sample plan language to be submitted by June 1, 2009. Plan sponsors are being asked to separately state how many opinion letter applications they will submit. It is anticipated that TIAA-CREF will be submitting comments on the proposed program and plan language, and indicating that we will be sponsoring a prototype 403(b) plan when the program commences.
After reviewing the public comments, the IRS expects to finalize its guidance and begin accepting applications for opinion letters from prototype plan sponsors, but the prototype program is not expected to be open for filings until later in 2009. The IRS has also indicated that after the prototype program is implemented, it intends to establish a determination letter program for individually designed (non-prototype) 403(b) plans.
Remedial Amendment Period
The proposed prototype program would also establish a remedial amendment period that will allow employers to retroactively correct any defects they may have in their written plans in order to bring them into compliance with the legal requirements governing the form of the plan document. This relief would be available for both prototype plans, and for individually designed plans that file under the 403(b) determination letter program that will be implemented in the future.
This remedial amendment period would generally run from January 1, 2010 and it will permit a plan document to be amended retroactively back to January 1, 2009 to bring it into compliance. Although the remedial amendment period does provide the opportunity for retroactive correction of any deficiencies in plan documents, it does not provide relief for employers that do not adopt a written plan by the 12/31/09 deadline. Consequently, the remedial amendment period should not viewed as a further extension of the time to amend/adopt 403(b) plans in order to meet the final 402(b) regulations' requirements. Rather, it is a way to correct form failures in documents that are timely adopted by 12/31/09 in reasonable good faith.
Key Features of the Proposed Revenue Procedure
Adoption Agreement Plan Design
Similar to qualified prototype plans, the proposed revenue procedure provides that there are two documents in a 403(b) prototype – a basic plan document (BPD) and an adoption agreement (AA). Multiple adoption agreements – for example, an AA for a salary reduction only plan and an AA for an employer funded retirement plan – can be used with the same BPD.
Provisions Required in a Prototype Plan
The revenue procedure describes the provisions that must be included in every 403(b) prototype plan. Some of these provisions include:
- the terms of the plan must control if the plan conflicts with the terms of the contract or custodial account (this will require careful analysis of the terms of the funding vehicles to ensure that there are no problems subsequently);
- the plan must identify the plan's funding arrangements or refer to a list separately maintained by the plan administrator;
- a prototype plan cannot provide for a vesting schedule (this could limit the appeal of a prototype if the employer wants to use a vesting schedule); and
- the plan must identify who will fulfill the various plan administrator functions, such as determining eligibility for loans and hardships, that are required under the final 403(b) plans (this will require employers with non-ERISA salary reduction plans to allocate duties to others to ensure they do not fall out of the safe harbor rule that limits employer involvement in making discretionary determinations)
Types of 403(b) Prototype Plans
There are two types of 403(b) prototypes: standardized and non-standardized. Standardized plans are elective deferral-only plans and employer funded retirement plans that satisfy nondiscrimination requirements through a safe harbor design (for example, the plan covers all non-excludable employees and defines compensation for determining contributions as total compensation). A non-standardized plan is a plan with employer contributions that is not a safe harbor design. Employers using a non-standardized plan will need to submit a request for a determination letter if they wish to obtain a ruling that they satisfy the nondiscrimination rules.
There are two different types of prototype sponsors: (1) a prototype sponsor that expects at least 30 eligible employers to adopt its plan; and (2) a mass submitter that expects to file opinion letter requests on behalf of at least 30 prototype sponsors, each of which is sponsoring the same BPD. At this time, it is anticipated that Ascensus will be a mass submitter and will file a request on behalf of TIAA.
Duties of Prototype Sponsors
Prototype sponsors must maintain a written record of the employers that have adopted its plan. A prototype sponsor will have an ongoing duty to amend its plan for changes in the law and to communicate those changes to employers that adopt its plan.
The review of a prototype by the IRS will consider only the BPD and AA: it will not review the terms of the funding vehicles. This does not however preclude the terms of the funding vehicles from being incorporated by reference.
Sample Plan Language
The draft sample 403(b) plan language is based on language previously developed for the qualified prototype plan program. Sample language is provided for salary reduction plans (Roth and non-Roth), non-elective and matching retirement plans and after tax employee contributions. This language supplements the model language for salary reduction plans of governmental employers that was included in Rev Proc 2007-71. Governmental employers may continue to rely on the language in Rev Proc 2007-71 if they adopt it word-for-word.
While the draft sample 403(b) plan language includes certain ERISA provisions, like hours-of-service and year-of-service definitions, it is generally silent on the Title I ERISA fiduciary provisions (which will apply to 403(b) plans subject to ERISA) as the IRS does not have jurisdiction with respect to these requirements. The draft sample 403(b) plan language provides that the ERISA provisions developed to enable a 401(a) plan sponsor to satisfy the IRC requirements that have parallel Title I requirements will be helpful in drafting plan provisions intended to comply with Title I. However, even if this approved language is used, the opinion letter for the 403(b) plan will not provide reliance with respect to Title I requirements.
Certain Plans Not Addressed
Certain types of plans may not receive 403(b) prototype opinion letters. These plans include church plans.
How TIAA-CREF Helps
TIAA is in the process of analyzing the details of the proposed IRS program and intends to work with industry groups to submit comments to the IRS on ways to improve it to better meet the needs of the plans that we serve.
Since June 2008, TIAA-CREF has offered a specimen plan document service to plan administrators, in collaboration with Ascensus, a retirement products provider which helps institutions achieve and maintain compliance with the written plan requirement. This service assists administrators in developing or revising their plan document, using a series of questionnaires to compile the necessary data. We plan to work with Ascensus to develop and sponsor a prototype plan, once the proposed 403(b) prototype program is finalized. And for those institutions that have already adopted one of our specimen 403(b) plans, we will be reviewing the specimen plans to determine if they comply. We intend to take advantage of the remedial amendment period to amend those plans as needed, but our initial review indicates that very few, if any, changes will be necessary. For more information on TIAA-CREF's Plan Document service, please contact your TIAA-CREF Managing Consultant or call the Administrator Telephone Center at 888 842-7782.