In our previous February and March newsletters, we discussed the new “pre-approved” 403(b) document program now being rolled out by the IRS. A pre-approved 403(b) plan document is one that has been submitted to the IRS by a plan document provider and that has received a letter of approval from the IRS. The approval letter means that the IRS has reviewed the document and found that it meets all of the requirements, in form, under section 403(b) and its regulations. By using a pre-approved document, the sponsor ensures that the IRS will not question the form of a document on audit. However, the plan still must meet the requirements of 403(b) in operation.
The IRS has just started to release the first letters for pre-approved documents, and service providers have started to contact plan sponsors with news that the new documents are available. Many plan sponsors will want to take the opportunity to adopt a pre-approved 403(b) plan, both in order to be assured that their document will be in compliance with tax law requirements and also to take advantage of the special retroactive relief that we described in the earlier newsletters noted above. However, plan sponsors will need to take care that they choose a pre-approved document that can accommodate their plan design, and, once they select an appropriate document, that all of the plan’s provisions are correctly restated on the new document.
The restatement of a plan onto a pre-approved document is also an opportunity to review the operation of the plan and to make sure that it is being administered in accordance with the terms of the document and applicable legal requirements. Conducting a periodic compliance review is a good idea even if the plan is not being restated, but a plan sponsor certainly wants to make sure that any current errors in the plan’s operation are not carried over to a new document.
In our experience working with 403(b) plans, there are a number of areas where we often find operational problems. As a starting point for plan sponsors conducting a compliance review, we have compiled the following high level list of provisions that bear scrutiny. This is not a complete list, but it highlights some common areas where the operation of the plan may not be consistent with the terms of the document or with applicable law:
1. The definition of compensation for determining benefits
2. Eligibility
Compliance with the universal availability requirement
Determining who is eligible for employer contributions
3. Compliance with IRS contribution limits
Application of the 15-year catch up rule
Imposition of the limit on maximum compensation that can be used to determine plan benefits
The application of the various rules that limit the maximum contributions that can be made to the plan
4. Compliance with the non-discrimination rules that apply to 403(b) plans
5. Ensuring that plan loans and hardship distributions are being administered correctly, particularly when the plan has multiple investment providers
6. Compliance with statutory restrictions on the distribution of elective deferrals and statutory and plan rules on employer contributions
7. Enforcement of required minimum distributions
8. Consistency in terms between plan document and the annuity contracts and custodial accounts
9. Timely transmittal of elective deferrals to plan investment arrangements
10. Compliance with all applicable disclosure and reporting requirements
11. Meeting fiduciary requirements with respect to the plan’s selection of investment options and other service providers
As mentioned, this is not a complete list, and other questions may well surface in the course of transitioning to a new document. Please let us know if you would like us to provide you with more information about either moving to a pre-approved 403(b) document or best practices in conducting a compliance review.
© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of May 31, 2017.