Actions to Take When Lacking Credentials to Have a 403(b) Plan

Q. What can be done if one finds that one is maintaining a 403(b) plan without the appropriate credentials? 

A. There are ways to fix or correct the situation:

• One option would be to analyze whether it is possible to qualify for tax exemption under Internal Revenue Code Section 501(c)(3); IRS Publication 557 may be of some help in that determination. 

Some public healthcare districts in California hold dual status as both “governmental” entities and 501(c)(3) tax-exempt organizations As such, they are eligible to maintain both a 403(b) plan and a governmental 457(b) plan — and obtain the advantages of the combined deferral limits. 

Although 501(c)(3) status generally cannot be obtained on a retroactive basis for most mature entities, it might be possible to utilize newly-obtained 501(c)(3) status as the basis for maintaining an active 403(b) plan as part of an Employee Plans Compliance Resolutions System (EPCRS) correction submission.

• The other option is to recognize that dual tax status is not appropriate and to correct the situation through EPCRS by applying to the IRS under the Voluntary Corrections Program (within EPCRS); and entering into a voluntary closing agreement with respect to the plan that acknowledges the “employer eligibility” failure, causes the plan to be frozen to new contributions and participants, and allows the frozen plan to retain its tax-favored status so that participants will not be currently taxed and will be able to make tax-free rollovers of future distributions.