In recent weeks, you likely have been receiving information regarding an upcoming amendment deadline for your 403(b) Plan. The following paragraphs provide some additional information regarding this amendment deadline and some options to consider.
1. Plan Document Requirement. In 2007, the Internal Revenue Service ("IRS") issued regulations that required an employer sponsoring a 403(b) plan to adopt a plan document that sets forth the terms and conditions of that plan. The deadline for adopting the plan document was December 31, 2009.
Since that time, the IRS has continued to issue guidance identifying specific items that a 403(b) plan document must address. In 2017, the IRS stated that, by March 31, 2020, an employer must amend its 403(b) plan document as needed to include all provisions required by this guidance. This March 31st deadline is sometimes referred to as the end of the "remedial amendment period." If an employer does not timely amend its 403(b) plan as required, the plan will lose its favorable tax status under Internal Revenue Code section 403(b).
2. Action Steps. If you sponsor a 403(b) plan and you have not yet updated your plan as required, you should review your plan document as soon as possible to see what, if any, changes are needed. It is very possible that you will need to update your 403(b) plan document. If you do need to update your plan, you may have the option of using a pre-approved plan document or an individually designed plan document.
(a) Pre-Approved Plan. The primary advantage of a pre-approved plan document (sometimes referred to as a "prototype" plan document or a "volume submitter" plan document) is that the IRS has reviewed the document and issued an advisory opinion stating that the document contains the required provisions for a 403(b) plan. Pre-approved plan documents, however, also have some disadvantages. The following are some examples.
- A pre-approved plan generally includes an adoption agreement and a basic plan document. The adoption agreement includes various optional provisions that an employer can elect to apply to its plan. If the employer incorrectly completes the adoption agreement, it is possible the plan will not satisfy the requirements for a 403(b) plan. In many cases, the organization that provides the pre-approved document will disclaim responsibility for how the document is completed, which effectively shifts that responsibility to the employer.
- Given that pre-approved plan documents must address a variety of potential plan designs, they can be quite long, difficult to read and understand, and include many provisions that do not apply to the employer's plan.
- In some cases, the service provider offering the pre-approved plan document also provides investment and/or recordkeeping services. As a condition to allowing the employer to use its pre-approved document, the provider might require that the employer use those services.
- Pre-approved plan document design options are generally limited to the options offered under the document. Therefore, an employer looking to implement a unique design feature might find that the feature is not a permitted option under the pre-approved document.
(b) Individually Designed Plan. Instead of using a pre-approved plan document to update a 403(b) plan, an employer can use an individually designed plan document. An individually designed plan is generally drafted by counsel and is tailored to the employer's specific 403(b) plan. As a result, an individually designed plan document is easier to read and follow and offers an employer the greatest flexibility in plan design. In addition, using an individually designed document does not require an employer to use any specific plan record-keeper or investments. The following are the primary disadvantages to individually designed plans.
- Unlike pre-approved plans, the IRS does not provide an approval process for individually designed plan documents. Given that the IRS provides guidance on the provisions a 403(b) plan must contain, however, the risk of not having the protection of an IRS approval letter should be relatively low.
- There would be drafting costs associated with an individually designed plan document. An employer should compare that cost to the cost the employer would incur in having counsel review a pre-approved document.
- Some record-keepers and investment providers may not agree to service 403(b) plans that use individually designed plan documents
von Briesen & Roper Legal Update is a periodic publication of von Briesen & Roper, s.c. It is intended for general information purposes for the community and highlights recent changes and developments in the legal area. This publication does not constitute legal advice, and the reader should consult legal counsel to determine how this information applies to any specific situation.