February 2, 2010

IRS Provides 403(b) Update at National Tax Sheltered Accounts Association's Annual Conference

On Friday, January 29, Ed Salyers, Senior Employee Plans Specialist with the IRS, spoke at the National Tax Sheltered Accounts Association’s 2010 National Conference about the status of several IRS projects regarding section 403(b) contracts, including (1) the forthcoming and much anticipated revenue procedure on the IRS 403(b) pre-approved program, (2) guidance on section 403(b) plan terminations, (3) an upcoming revenue procedure updating the Employee Plans Compliance Resolution System (“EPCRS”), and (4) IRS audits of 403(b) arrangements

Section 403(b) pre-approved plan document program
Mr.. Salyer said the IRS is finalizing the 403(b) pre-approved plan document program revenue procedure with sample 403(b) plan language, and expects it to be issued this spring. In response to public comments, the pre-approval program will cover both prototype plans and volume submitter plans, and the sample plan language will address vesting schedules and church plans. In addition, the IRS will be establishing a remedial amendment period for section 403(b) written plans.

This pre-approved program will not cover individually designed section 403(b) plans. Mr. Salyers said that the IRS is developing a separate section 403(b) approval letter program for these plans. This approval letter program is expected to open approximately one year after the pre-approved program opens.

Plan terminations

The section 403(b) regulations provide special rules for the termination of a section 403(b) plan. In order for a section 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as “administratively practicable” after termination of the plan. For this purpose, the delivery of a fully paid individual annuity contract is treated as a distribution.

However, the regulations do not address the distribution of a section 403(b)(7) custodial account. In particular, it is unclear how the accumulated benefits under a custodial account can be distributed, and whether a custodial account can be treated as distributed for this purpose without being liquidated. Mr. Salyers indicated that the IRS recognizes the importance of this issue and will issue guidance addressing this question and other aspects of plan terminations. He said that the IRS is only at the very early stages of this project, and is in the process of assembling the team assigned to consider this matter. We should not expect guidance on this issue soon.

Upcoming EPCRS revenue procedure

The IRS is updating the EPCRS revenue procedure to provide guidance on how to correct 403(b) plan document failures. Mr. Salyers explained that the procedures for correcting such failures will be similar to those for correcting plan document failures in qualified plans.

IRS audits

Mr. Salyers indicated that the IRS will be stepping up its audits of section 403(b) plans. Common compliance problems the IRS will be examining include violations of (1) the universal availability requirement, (2) the contribution limitations under section 402(g) and section 415, (3) the section 72(p) loan limitations, (4) the hardship distribution requirements, (5) the eligible employer requirements, and (6) the written plan requirement. Mr. Salyers said the IRS will determine if a proper written plan is in place and the plan is operated in accordance with its terms. In addition, he indicated if the IRS discovers a 403(b) plan document failure on audit, the IRS will give the employer an opportunity to correct the failure using the forthcoming section 403(b) pre-approved program discussed above.

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