SPARK Offers Suggestions for 403(b) Prototype Program

In the letter, SPARK requested changes to prototype document requirements to expand employer eligibility to use the document, clarify the interaction between certain document provisions and the underlying funding vehicles, and allow employers additional flexibility. The SPARK Institute said it believes the most significant revision that is necessary to expand the availability of the prototype program is to permit the use of a vesting schedule in the prototype plan.

SPARK pointed out that the Draft Revenue Procedure 2009-34 released in April (see “IRS Releases Proposed 403(b) Prototype Document Program“) emphasizes the IRS’s objective to make the prototype plan program available to as many plan sponsors as possible, and many 403(b) plans, especially ERISA-covered 403(b) plans, include employer contributions with vesting schedules.

SPARK requested that Section 5.10 of the Revenue Procedure and the Listing of Required Modifications (LRM) be revised by recognizing the existence of one or more vesting schedules for employer contributions, provided that non-vested amounts are separately accounted for. It also requested that the prototype plan allow for graded vesting schedules based upon age or service criteria.

In addition, the Institute proposed that the IRS revise the LRM to permit additional employer contribution alternatives, waiting periods and employee contributions that are mandatory as a condition of employment or subject to a one-time irrevocable election in prototype 403(b) plans.

Accommodating for Multiple Vendors

In its comment letter, SPARK expressed concern that the proposed requirement that a prototype plan preempt any conflicting provisions of the annuity contract or custodial account (funding vehicles) significantly raises the likelihood of unnecessary operational defects in the event of conflicts between two otherwise compliant documents. The Institute pointed out that many 403(b) plans consist of multiple existing funding vehicles, the terms of which are already in existence and consistent with the requirements of Section 403(b).

In some cases, those funding vehicles will include restrictions in excess of those imposed by the plan, which would not threaten the plan’s compliance with the Code and the regulations. The sample plan language in Rev. Proc. 2007-71 acknowledges this fact with respect to loans, for example, SPARK pointed out. The regulations acknowledge the role the terms of the funding vehicles may play, by allowing those terms to be incorporated into the plan by reference

In addition, the letter noted that funding vehicles used in 403(b) plans are subject to federal securities laws and the laws of the various state insurance agencies, and after one is issued it is difficult if not impossible to change. If the terms of the funding vehicle conflict with the terms of the prototype plan, an inadvertent operational or plan document failure could result, even more problematic for employers that use multiple Funding Vehicles.

In its letter, SPARK recommended the IRS change the document to say: “The Plan Administrator shall maintain a list of all Vendors under the Plan, including sufficient information to identify corresponding Funding Vehicles. Such a list and the identified Funding Vehicles are hereby incorporated as part of the Plan. In the event of a conflict between the Plan and a Funding Vehicle: (a) the terms of the Plan shall govern to the extent necessary to satisfy requirements of the Code and regulations; (b) the Plan may limit a Participant’s rights under the Funding Vehicle but may not enlarge the duties or diminish the contractual protections of the Vendor without the consent of the Vendor.”

The Institute proposed that the agency issue a list of the tax compliance provisions that must be included in all plans and funding vehicles, and a subset of provisions which can be incorporated by reference from the plan into the funding vehicle (or omitted altogether) if the funding vehicle is used in conjunction with a plan.

SPARK also addressed plan administration in multi-vendor environments, suggesting that when administrative duties are allocated among two or more parties that service provider agreements are incorporated into the plan by reference.

Other revisions suggested in the letter include changes to term definitions and clarifications on loan and hardship provisions.

The letter can be accessed from the SPARK Institute Web site here.