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IRS Advisory Council 403(b) Recommendations

This article originally ran on October 6, 2015.

By Robert J. Toth

The IRS maintains an advisory council of professionals which provides recommendations on, among other things, IRS programs and procedures which affect retirement plans. This council is called the Advisory Committee on Tax Exempt and Government Entities (ACT). The members all serve on a voluntary basis, but they have substantial influence over the IRS’ policy positions decisions.

The ACT’s Employee Plans Subcommittee took it upon itself this year to perform a substantial review of the IRS’ 403(b) policies and procedures. It wanted to re-examine the current state of the 403(b) community eight years after the issuance of the 403(b) final regulations in 2007. 

The ACT first conducted a survey of 403(b) plan sponsors and practitioners, and followed up on the survey with interviews of practitioners and sponsors throughout the country. This resulted in its issuing recommendations to the IRS on June 17, which identified four different areas related to 403(b) plans that the IRS needs to issue guidance and support.  

These recommendations do a pretty good job of outlining the major tax law issues facing the 403(b) marketplace.

Importantly, the ACT noted that the “overarching” obstacle that impedes many 403(b) plan sponsors from remaining in compliance with the is the conflict between the duty of the 403(b) plan sponsor to ensure that the plan stays in compliance with the Internal Revenue Code and its competing interest in avoiding significant involvement with the plan, possibly triggering ERISA status.

 It also noted something with which much of the 403(b) community is familiar: the “unhealthy” level of dependence on service providers who have at least an equal interest in avoiding the “fiduciary” label. 

These are the four areas that the ACT recommended that the IRS provide further action:

Universal availability. This is an operational issue that has long been identified by both by the IRS and the 403(b) community as being a particularly challenging requirement. 403(b) requires that all employees (except for limited exclusions) who normally work more than 20 hours per week or 1,000 hours per year are required to be permitted to defer into the plan. In practice, given the wide range of different kind of employment arrangements entered into by school districts and tax exempt employers (think about part-time and seasonal coaches, per diem hospital employees, and student employees, for example), this becomes a very challenging rule to implement. 

The ACT strongly stated that without heightened emphasis on educating 403(b) plan sponsors — including specific examples — about the impact and operation of the these rules, “extensive noncompliance will continue to exist.”

Orphan 403(b) contracts. The ACT noted that there continues to be considerable confusion and uncertainty as to what are a 403(b) plan sponsor’s obligations regarding orphan contracts. This concern was also expressed by members of the 403(b) vendor community with whom the ACT members had separate discussions on 403(b) plans. “Orphan contracts” arise from contracts of employers that no longer sponsor plans; plans for which employers no longer exist; or more frequently, pre-2009 contracts. 

The ACT found there to be “considerable confusion and uncertainty” as to how these plans can be administered without employer involvement. It noted that this “is no idle concern since current sample information document requests (IDRs) used for 403(b) plan audits that we have seen ask for information/documentation concerning pre-2009 vendors that no longer receive contributions.”

The ACT strongly recommended that the IRS issue guidance on how employers and vendors should handle these contracts. 

Termination of 403(b) plans. Terminating 403(b) plans continues to be a problem because of the IRS’s informal position that, unlike annuity contracts which can be distributed upon plan termination, custodial accounts cannot be so distributed. This has forced many employers into finding creative ways to terminate their 403(b) plans, some of which may not be acceptable to the IRS.

The ACT has asked the IRS to clarify whether or not it considers itself as having the legal authority to permit such distributions; if not, then to seek a legislative change; and then to issue relief for employers who have taken “creative” action in good faith to terminate plans with custodial contracts. 

EPCRS. Finally, the ACT recommended that the IRS’ Employee Plans Compliance Resolution System (EPCRS) be substantially expanded to cover more 403(b) problems. EPCRS is the program established by the IRS for employers to fix operational, document and “qualification” errors the find in their plans while paying minimal penalties. Specifically, the ACT recommended the following changes:

  • Expand the “self-correction” procedures to include correction for common loan failures
  • Allow plan sponsors to use the DOL earnings calculator (as is provided for in the DOL’s Voluntary Fiduciary Correction Program) to compute lost earnings.
  • Develop additional, and more specific, schedules for the correction filings to allow for correction of the most common 403(b) operational failures.
  • Reduce the filing fees for the 403(b) community, if only for a reasonable period of time, to allow these compliance errors in the remedial amendment period to be discovered and corrected.
NTSA has been active on all of these issues, and it will be interesting to see if the IRS responds to its own advisory panel. 

Robert J. Toth, Jr., is Principal at Toth Law.

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