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The Birth of the First Ever IRS Pre-Approved 403(b) Plan Documents!

Susan D. Diehl

Remember when you were a child and you just knew that you were going to get everything you asked for on your Christmas list? The anticipation that you felt was unnerving! You couldn’t sleep the night before, but if you didn’t then Santa was not going to bring you anything, so you had to try. The next morning finally arrived and most but not all of the items on your list was there…but that was ok, plenty to still have fun with.

With the birth of the first pre-approved program for 403(b) right around the corner, the anticipation of many TPAs, consultants and attorneys has been unnerving as well, and for some of us is like waiting for the treasured Christmas present.

Keep in mind that employers have maintained 403(b) plans beginning in 1959, well before 401(k) plans were even a glimmer in anyone’s thoughts. Employers will, for the first time need to restate their plans to reflect a ‘real’ plan document by the end of the Remedial Amendment Period (RAP).

And then Santa Came Through!

On Friday the 13th (Jan. 13, 2017) the IRS issued Revenue Procedure 2017-18 which provides Employers with a three-year remedial amendment period (RAP) that ends 3/31/2020! Merry Christmas; Happy Hanukkah, and Happy New Year!

So now we are on our way, but we still have a number of items to receive from the IRS, namely more guidance and of course the actual approval letters. This is the first RAP for 403(b) documents in the history of these plans!

The restatement period will be a three-year period ending on March 31, 2020. The IRS plans on issuing their approval letters (opinion letters for prototype plans and advisory letters for volume submitter plans) on the plans that have been submitted by March 31, 2017. Once the letters are issued, employers can start restating their plans.

There is a lot to address for this new ‘project,’ so we will present multiple articles as time goes on to make sure your firm understands this restatement process fully.

What does ‘Restatement’ mean?

Restatement (which has applied to qualified plans like 401(k)s, 401(a) plans, and pension plans since 1976), is a period which the IRS gives employers to adopt an updated plan document that retroactively incorporates certain law changes that have occurred, going back to the beginning of the RAP. Since this is the first RAP period for 403(b) plans, the restatement and amendment goes back to Jan. 1, 2010. All employers should have already adopted a plan document for the 2009 plan year by Dec. 31, 2009.

Due to the complexity and volume of work to be completed by financial institutions; TPAs; and their clients we strongly suggest that this process be initiated as soon as possible. Collecting data on the amendments that have been made for 7-10 years can be a challenge.

If the employer did not adopt a plan for the 2009 plan year, they should contact their administrator, or vendor to see what options they have to correct this failure.

Why Is this Date Important? And Must the Employer Adopt an IRS Approved 403(b) Plan?

A restatement on an IRS pre-approved plan means that the employer has reliance that the provisions in the pre-approved plan are compliant with IRS regulations, which ensures that the plan assets are protected from taxation. Upon an IRS audit, use of a pre-approved plan means that the IRS will not need to read the plan document to see if it contains all of the qualification requirements. If the employer instead uses a document that does not have IRS approval, the IRS will scrutinize the entire plan document to determine if there is a ‘disqualifying’ provision. If this happens, all of the assets would be immediately taxed, or the employer must pay a sanction in addition to making the required changes to the plan language.

Keep in mind as well that no 403(b) documents used before the pre-approved plans were officially “approved” by the IRS, AND none of the past documents that were used will be updated for the new requirements.

What Needs to Be Completed by March 31, 2020?

1. As stated above all employers must restate on an IRS approved document by March 31, 2020, which means the adoption agreement must be sign and dated no later than March 31, 2020.

2. One of the most important features of the restatement is that ALL amendments made from Jan. 1, 2020 through the date of restatement must be indicated in the restated plan document. We typically refer to this as the restatement reconciliation page.

For example, an employer adopted a plan by the end of 2009 as required making sure that all provisions were stated in the plan to mirror the operations of the plan through the end of 2009. In 2010, the employer added loans to the plan; in 2012 the employer added a nonelective contribution with a 1 year eligibility requirement; and in 2014 the employer added post-employment contributions.

On Dec. 20, 2017, the employer executes the new IRS approved plan. In this case the employer would sign the restated plan with the effective date of Jan. 1, 2020. The Employer must also indicate in the adoption agreement, the effective dates of the amendments that have occurred since 2010. The employer would use the restatement effective date addendum (or whatever it may be called in your client’s document) to outline amendments (between 2010 and Dec. 20, 2017), as follows:

  • Participant Loans: Effective June 30, 2010

  • Nonelective Contributions: Effective Jan. 1, 2012

  • 1-year eligibility for Nonelective Contributions: Effective Jan. 1, 2012

  • Post-employment contributions: Effective Jan. 1, 2014

Without these being indicated as the interim amendments, the employer will not have ‘reliance’ back to Jan. 1, 2010. The IRS has already indicated that they will be reviewing this portion of the adoption agreement.

3. All annuity contracts and custodial agreements (“contracts”) must be updated to reflect all changes that have occurred since 2009 and most importantly to reflect the fact there is now a plan in place and certain provisions are required to be in the plan document. Additionally, there are also provisions that must be included in all contracts by March 31, 2020. For example, the IRS specified that the RMD requirements must be specified in the contracts, rather than the plan document. This cannot be by way of reference; the contracts must contain specific definitions and language to comply with the RMD requirements. We will address this in more detail in a future article.

4. Annual Reviews: The new IRS approved plan documents will include an administrative appendix (to be completed with responsibilities and provided to all employers), one of the items on this appendix will be the responsibility of ‘auditing the vendors’ each year. Although this is not a new requirement, should a plan be audited, the IRS may request documentation of the employer’s vendor audit. This requires a request for and a review of all forms, documents, procedures, etc. maintained by the vendor, including but not limited to: distribution forms and procedures; withholding notices and procedures; etc.

5. Remember that most employers are coming from an adoption agreement that was a few pages long to something that may be 10-20 pages long depending on the type plan they are restating.

6. Complete the administrative appendix based on the services that you offer as a TPA. This will help the employer understand if there is something that they must do.

7. Keep copies of signed documents and amendments that are made going forward. This will be of great assistance to an employer should they get audited.

More to Come…

Mass submitters of 403(b) plan documents will be receiving emails on the approval of their plans. This is merely a ‘pre-notice’ that the language has been approved, in order to get the documents ready for the restatement process. The actual letters will be mailed to the mass submitter no later than March 31, 2017. After checking the letters for accuracy, mass submitters will then send copies to all of the financial institutions who submitted under their plans adopting them on a word-for-word basis.

We anticipate that this will probably take place sometime in April of 2017.

WAIT!! Did I say a holiday present…maybe I really meant to say it was issued on Friday the 13th!

Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc., and Chair, NTSA Professional Development Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.