The 403(b) Plan Document Deadline is Just Around the Corner

Michael Webb

In less than three months, all 403(b) plans will be required to maintain a written plan document for the first time in the history of 403(b). In the final 403(b) regulations, the IRS had originally stated that all plans must be administered in accordance with a written plan by January 1, 2009, but the deadline was extended to January 1, 2010.

Employee Retirement Income Security Act (ERISA) plan sponsors will not be unduly concerned, since ERISA, of course, has required a plan document for plans under its jurisdiction since 1974. However, public schools, most religious organizations and elective deferral-only plans that are intended to be ERISA exempt had never been required to maintain a written plan—until now.

In anticipation of the plan document requirement, on April 14, 2009, the IRS posted proposed 403(b) sample plan language, along with Announcement 2009-43, which contained a draft revenue procedure for the establishment of a prototype 403(b) program for plan documents. The prototype program, which is currently used for qualified plans such as 401(k) plans, allows a TPA/record keeper/plan vendor to obtain IRS approval of a generic plan document in the form of an opinion letter. An employer can then adopt that generic documentation via an adoption agreement, which would contain the specific provisions of an individual employer’s plan. Alternatively, the employer could obtain approval by submitting its plan to the IRS directly. Since the IRS approval process (known as a determination letter program) can be cumbersome, the prototype program has proved somewhat popular with 401(k) plans.

The prototype program for 403(b) plans, however, is not yet operational, and the earliest possible deadline for plan submissions under the program is March 15, 2010. Given past IRS practice in this area, even that date is likely to be delayed. In the interim, the sample plan language offers an appropriate template for sponsors who do not currently maintain a written guide to follow in establishing a plan document.

Although ERISA plan sponsors already maintain written documents for their plans, those documents will probably need to be modified by January 1, 2010, to include new plan language required by the IRS. While not currently effective, one byproduct of the 403(b) program is that it will likely cause TPAs/record keepers/vendors to modify their generic plan documents later in 2009 or in 2010—depending upon the final effective date of the prototype program—to submit to the IRS for approval under the prototype program. Since most vendor documents have already been restated to comply with the final 403(b) regulations, employers who utilize a vendor prototype may well need to restate their plans twice.

But are prototypes the document solution for everyone? In the 401(k) world, not all employers utilize a vendor prototype document. Instead, some prefer to draft a customized, individually designed plan document, typically in conjunction with benefits counsel, which they then submit to the IRS for approval under its determination letter program. Such a program is expected to be available for 403(b) plans as well, but not until the prototype program has been implemented, in other words, late 2010 at the earliest.

As a general rule, the larger and more complicated the plan, the less likely employees will be to use a prototype document. A nuance of the 403(b) prototype program is that plans with vesting schedules may not utilize a prototype plan document, which will mean that far fewer 403(b) plans than 401(k) plans will be able to take advantage of the program. The IRS has nonetheless received several comments from 403(b) practitioners urging the removal of the vesting schedule restriction, so there is hope that plans with a vesting schedule will be welcomed into the prototype program once it is finalized.

Regardless of whether a prototype or individually designed plan is adopted, all plan sponsors (whether subject to ERISA or not), should be aware that the plan document language must conform to all aspects of plan operation. Thus, plan provisions should be crystal clear to all those responsible for plan administration. Plan operations should be periodically audited to confirm that the plan terms are being followed to the letter. Such compliance is extremely important, since any deviation from plan terms can potentially lead to plan disqualification and subject all participants’ account balances to immediate taxation.