Welcomed IRS Guidance for 403(b) Plans

The Internal Revenue Service (IRS) recently issued a bevy of valuable guidance for eagerly awaiting 403(b) plan sponsors. This flurry began with the expansion of the Employer Plans Compliance Resolution System in Revenue Procedure 2013-12, which was released on December 31, 2012. Then, on February 21, 2013, the IRS issued the 403(b) Fix-It Guide, a new installment in the popular series that provides steerage to plan sponsors with correction needs. Saving perhaps the most anticipated for last, IRS finally pronounced an opinion and advisory letter program for prototype and volume submitter 403(b) plan documents in Revenue Procedure 2013-22, issued on March 28, 2013. This guidance is extremely valuable to a 403(b) plan sponsor looking for the right path.

EPCRS Expansion

The IRS maintains the Employee Plans Compliance Resolution System (EPCRS) to provide plan sponsors with the opportunity and ability to correct most instances of noncompliance in a specified way. Most often, the prescribed corrective action will place affected participants in the position they would have been in had the error not occurred. The EPCRS supports three foundational programs:

Self-Correction Program (SCP)

The SCP is used to correct insignificant operational problems at any time. Even significant operational problems generally may also be corrected within two years of the problem year. The SCP requires no application and no fee is required to use it. Relief under the SCP is limited to Operational Failures (i.e. not following plan document provisions).

Voluntary Correction Program (VCP)

The VCP is used to correct Qualification Failures (i.e. any failure to comply with Code section 401(a), 403(a), or 403(b)) prior to the plan being selected for a formal IRS examination. The IRS requires an extensive application and the completion of special forms, and plan sponsors must pay a fee determined per instance with reference to variables such as number of participants, the type of error being corrected, the type of plan that is being corrected, etc. The IRS’s VCP fee can be as little as $375 to correct a failure to adopt a written plan document compliant with the law by December 31, 2009 for a plan with 20 or fewer participants or as much as $25,000 to correct an error effecting 10,000 or more participants. Upon submission under VCP, the IRS will issue a prescriptive Compliance Statement which the employer must act upon within 150 days of issuance.

Audit Closing Agreement Program (Audit CAP)

The Audit CAP is used in conjunction with a formal IRS examination. The corrective action and formulaic sanctions prescribed will depend on the circumstances surrounding the error(s) discovered during examination. The IRS’s Closing Agreement usually signals the end of the investigation.

Complete current rules and procedures under EPCRS may be found at Revenue Procedure 2013-12. Revenue Procedure 2013-12 became effective January 1, 2013 for all 403(b) plans and April 1, 2013 for all other EPCRS-covered plan types.

403(b) Fix-It Guide

As a follow-up to the new EPCRS, the IRS published the 403(b) Fix-it Guide on February 21, 2013. The Fix-It Guide library is very popular among plan sponsors with questions about retirement plan mistakes or deficiencies under IRS jurisdiction. The Fix-it Guide takes the form of a table that describes possible mistakes, suggests detection methods, provides corrective steerage and recommends avoidance tactics for each mistake listed. Specifically covered issues include:

  • Sponsoring a 403(b) plan without meeting the eligible employer criteria;
  • Failing to adopt a legally obedient written plan document by December 31, 2009;
  • Operating the plan differently than its provisions mandate;
  • Prohibiting eligible employees to make employee deferrals of compensation;
  • Making excess annual contributions or remitting excess deferrals;
  • Misapplying the 15 years of service catch-up provision;
  • Administering loan provisions outside of legal boundaries; and
  • Approving hardship withdrawals without collecting substantiating documentation.

Letter Program & Model Language

Revenue Procedure 2013-22, issued on March 28, 2013 with an April 29, 2013 effective date, sets forth a program under which the IRS can finally issue opinion and advisory letters for 403(b) plans using volume submitter or prototype plan documents. Under the newly minted letter program, the IRS will accept applications for opinion and advisory letters regarding the acceptability of the plan under Code section 403(b) starting June 28, 2013 with first letters issued in later summer. This Revenue Procedure was accompanied by much appreciated sample plan document language that document providers will consider incorporating before filing for their opinion or advisory letter under the program. Plan sponsors are encouraged to contact their prototype or volume submitter document provider to inquire when they should expect to receive their opinion or advisory letter.

Looking Ahead

Both the IRS and DOL have invested significant regulatory energy on 403(b) plan-specific issues over the past 8 years. A big chunk of that attention was spent on the landmark regulations that were effective January 1, 2009, spawning massive changes the 403(b) plan culture. Much of the subsequent guidance set forth after 2009 relates back to issues created by these monumental regulations. Now, within a three-month period, the IRS has answered a pile of questions—providing resolution on a broad spectrum of plan document and compliance issues.

It may be difficult to imagine that unresolved questions could possibly remain amidst the swollen sea of legislation, regulations and other guidance that applies to 403(b) plans. However, the IRS and DOL still have work to do. For 403(b) plans specifically, questions hover on the topic of plan termination in particular. Unsettled questions that equally impact other types of plans revolve around in-plan Roth conversions, electronic delivery of participant notifications and certain fee disclosure issues—to name a few. While we cannot be sure when additional guidance will be provided, we can safely conclude that more changes are coming.


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