403(b) Outlook: IRS Issues Deadline Extension for 403(b) Plan Documents
December 18, 2008
In its Notice 2009-3, issued last Thursday, December 11, the IRS extended written plan requirement deadline for 403(b) plans from January 1, 2009, to the end of the year (December 31, 2009).
It’s important to note, however, that the IRS did not extend the effective date of the regulations or other deadlines for operational compliance with the new 403(b) regulations as described in this communication.
About the deadline extension for 403(b) plan documents
The final 403(b) regulations require that every 403(b) plan, both ERISA and non-ERISA, have a written plan document (or a series of documents that function as a plan document) that outlines the terms of the plan and investment provider responsibilities. To ensure compliance, the terms of the document(s) must be consistent with the terms of annuity contracts and custodial accounts that are approved under the plan.
Notice 2009-3 gives plan sponsors additional time to put their written plan documents in place Specifically, the notice provides that plans will be treated as meeting the 403(b) requirements and the regulations during the 2009 calendar year, if the plan sponsor meets the following three requirements:
- By December 31, 2009, the plan sponsor has adopted a written 403(b) plan that satisfies the requirements of 403(b) and the regulations.
- During 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of 403(b) and the related regulations. Although there has been no general delay of the effective date, during 2009, operational compliance can be achieved based on a reasonable interpretation of the statutory and regulatory requirements.
- By the end of 2009, plan sponsors make their best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the written plan, with correction based on the principles outlined in the IRS’s correction program, Employee Plans Compliance Resolution System (EPCRS) under Rev Proc 2008-50.
In June 2008, TIAA-CREF began offering a service, in collaboration with Ascensus, to assist plan sponsors in developing or revising their plan document(s), using a series of questionnaires to compile the necessary data.
So if you have already completed a plan document, you need not worry. And although the deadline extension certainly relieves the pressure on others who have not yet completed a document, we remain committed to working with all our clients to complete their plan documents as early as possible in 2009.
Further IRS guidance expected for 403(b) plans
The IRS has indicated that it will be offering additional guidance for plan sponsors regarding the new 403(b) regulations in 2009. Specifically, we expect:
- Prototype program and sample plan language: The IRS said it intends to establish a 403(b) prototype program. This will include a revenue procedure about how eligible plan sponsors can obtain IRS approval of prototype 403(b) plans. This revenue procedure will also include sample plan language for drafting the prototype plans. This will allow plans to make remedial amendments to retroactively fix plan provisions under rules that are similar to those that apply for 401(a) qualified plans. The IRS has indicated that this revenue procedure will be issued in draft form and that it will solicit comments.
- Individually designed 403(b) plan program: Once the prototype program is established, a determination letter program for individually designed 403(b) plans will be developed as well.
- EPCRS update: The IRS further indicated that it will be updating EPCRS to include 403(b) issues. We do not expect that this will be issued by the IRS until after the revenue procedure on prototype plans is finalized and that the correction methods and issues identified in the updated EPCRS will be used for correcting the operational failures that are identified by the end of 2009.
What you still need to do to be in compliance with 403(b) regulations
As mentioned above, during 2009 compliance can be achieved if your institution operates the plan in accordance with a “reasonable interpretation” of the statute and regulations. The IRS Notice does not provide specific guidance on what constitutes a “reasonable interpretation.” But it appears that information sharing requirements will be the subject of the reasonable interpretation relief. Moreover, plan sponsors will have until December 31, 2009, to identify and retroactively correct operational failures.
Here are other regulatory requirements that still need to be in place by January 1, 2009, for institutional compliance:
- Nondiscrimination testing: The final regulations repealed the disparity safe harbors and good faith reasonable testing standard set out in IRS Notice 89-23, which many 403(b) plans relied on with respect to the nondiscrimination requirements applicable to employer non-elective contributions. The repeal of Notice 89-23 (and the impact on nondiscrimination testing) will be effective on January 1, 2009.
- Ordering Rule for Catch-up Contributions: If an employee is eligible for both the special 15 years of service catch-up contribution and the age 50 catch up, but does not tax defer to the maximum amount that would be permitted, the final regulations confirm that the special catch up is to be utilized first. This affects the limit on elective deferrals that an individual is allowed to contribute in a given year.
- Timing of Contribution Remittances: Employee salary deferral contributions must be submitted within a period that is not longer than reasonable for proper administration of the plan. (The regulations reference the 15th business day after the month in which deferrals are withheld as reasonable for this purpose.) This rule is similar, but not quite as strict, to the ERISA requirement that currently applies to ERISA salary reduction plans. ERISA plans must meet the existing U.S. Department of Labor standards for remitting participant contributions which is more stringent — e.g., as soon as administratively possible but no later than 15 business days following the month in which deferrals are withheld.
Required Minimum Distributions suspended in 2009
President Bush is expected to sign legislation (The Worker, Retiree and Employer Recovery Act of 2008) soon that will allow people who have reached the age of 70½ and are subject to the required minimum distribution rules to temporarily defer withdrawals from their retirement plan or Individual Retirement Accounts in 2009 without triggering a penalty. The suspension provides potential relief for individuals whose retirement accounts have dropped as a result of faltering markets by providing more time to recoup any losses.
The decision whether to defer taking a “required minimum distribution” is voluntary. The legislation treats equally individuals who usually take the “required distribution” amount monthly and those who take a lump sum amount at the end of the year.
The legislation won't help those individuals who were hoping to avoid taking a withdrawal in 2008, or have already taken a withdrawal. However, the U.S. Treasury Department is considering relief with respect to minimum distributions made in 2008.
TIAA-CREF supports temporary relief from the minimum distribution rules and is actively engaged with the Treasury Department on the issue. We will communicate about additional changes affecting the tax treatment of distributions as soon as any action is taken. Of course, individuals should always discuss specific tax implications for them with their tax advisor.
Any of your employees who have questions about required minimum distributions may call TIAA-CREF at 800 842-2776. In addition, they should visit our website, tiaa-cref.org, for the latest updates.
Rest assured, too, that TIAA-CREF will fully support you should any changes be required in sample language for plans, based on IRS guidance.