In a Webcast sponsored by the Southeastern Association of School Business Officials, with support from VALIC, Robert J. Architect, senior tax law specialist at the Internal Revenue Service, cleared up some confusion about the IRS’ relief on the written plan document requirement for 403(b) plans—and it is good news for sponsors.

Notice 2009-3 (see “IRS Offers Relief for 403(b) Written Plan Requirement’) said the IRS will treat plans as meeting the requirements of 403(b) and the regulations during the 2009 calendar year if:

• by December 31, 2009, the plan sponsor has adopted a written 403(b) plan that is intended to satisfy the requirements of 403(b) (including the final regulations) effective as of January 1, 2009;
• during 2009, the plan sponsor operates the plan in accordance with a reasonable interpretation of 403(b) and the related regulations;
• by the end of 2009, the plan sponsor makes its best effort to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written plan.

Architect told Webcast attendees that this does not mean the adopted plan has to be effective as of January 1, 2009, or that sponsors have to correct back to January 1, 2009, operations in contrast to the terms of the plan. Rather, the language of the notice means plans must satisfy the regulations that were in effect as of January 1, 2009, and sponsors must correct operations in contrast to the terms of the plan as of the plan’s effective date.

Architect assured attendees that the IRS would not cite sponsors for a form failure for having no document or amendment in place during the period from January 1, 2009, until the effective date of their adopted plan.

That noise you hear? It is the collective sigh of relief from those who had interpreted the language of the notice differently.

Why Rush to Adopt a Written Plan?

Despite this clarification on the written plan relief, Richard Turner, vice president and deputy general counsel at VALIC, encouraged Webcast attendees not to wait too long to adopt their written plan document.

Architect agreed. While the IRS relief on the written plan document requirement deadline provided much needed time for school districts and other plan sponsors to get through the bureaucracy of getting their written plan approved, for plan sponsors without the same approval hierarchy, the sooner the plan is in place the better.

That’s because, while the clarification on relief may mean fewer corrections than once thought, some corrections will still be inevitable, especially in cases where the person(s) handling day-to-day operations of the plan may not be privy to all the actions of those responsible for deciding plan terms and approving the plan.

Document or not, the final regulations are in effect. Turner pointed out that clearly, as of January 1, 2009, sponsors would have to correct any operations that were not consistent with the regulations, including contributions made in excess of statutory limits, contributions not made for employees who should have been allowed to participate, and impermissible distributions. However, to conform to their written plan, sponsors may find themselves with other more arduous corrections to make.

Sponsors that do not want to be subject to the administrative burdens of such corrections and that are already sure of which provisions they will offer in their plans—or that do not want to raise the ire of plan participants—would be better off getting their plan in place now.

Turner added that many sponsors that do not have a document in place may instead be using provisions of annuity contracts and/or custodial agreements as a guide, and coordinating information among approved providers or requiring that they coordinate among each other. If the plan they adopt assigns a central coordinator or limits transactions such as loans or hardship withdrawals to one provider, the easiest thing to do is to put both sets of procedures in the plan, Turner said. For example, the plan may say that prior to July 1 participants may take a loan from all provider accounts up to the plan limit, but after July 1 loans may only be taken from accounts with Provider A.

Waiting on IRS Approval

During the Webcast, Architect said that, when issuing Notice 2009-3, the IRS recognized that many plan sponsors were not ready with written plan documents and that the regulations did not provide for a remedial amendment period and there was no pre-approved prototype or determination letter program.

Architect assured sponsors that a pre-approved prototype plan program is still coming as promised last year (see “IRS Developing Pre-approved Plan Program for 403(b)s’). He said that within a month or two the IRS will draft a revenue procedure for the program it hopes to open up in summer of 2009. The revenue procedure will be an instruction booklet for entities that want to submit a prototype document for approval, according to Architect.

Meanwhile, Architect pointed plan sponsors to Rev. Proc. 2007-71 (see “IRS Offers Model 403(b) Plan Language for Public Schools’) to answer questions such as how to issue loans to former participants without disqualifying the plan and what in-service withdrawals are permitted.

Finally, Architect warned plan sponsors that the provision of Rev. Proc. 2007-71 that says contracts issued before 2009 as part of an employer’s plan are considered to be part of the written plan if the employer makes a reasonable, good faith effort to establish information-sharing agreements with the orphaned provider is not delayed, and ended December 31. Turner advised that sponsors include in ISAs with current approved providers a provision that, as long as plan assets are held with the provider, it must continue to share information, even if later deselected.