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The New 403(b) Plan Documents: Protecting Your Clients

By John Iekel

March 31, 2020. Less than two years remain until the date by which 403(b) plan sponsors which seek to self-correct plan provisions that violate the Internal Revenue Code can do so. An April 18 NTSA webinar discussed what some employers are doing to correct errors and make restatements by that date certain.

In “The New 403(b) Plan Documents Part III: The Final Chapter — Protecting Your Clients,” Susan Diehl offers a close-up of what some employers are doing in advance of the impending day of reckoning, and how to fix certain operational issues during the restatement. The webinar is the third in a series covering the new 403(b) pre-approved plan and the restatement process.

“The IRS has made it clear,” said Diehl, that 403(b) plan sponsors may self-correct in a little less than two years’ time. She reminded that they can do this by either:

1. adopting a 403(b) pre-approved plan that has a 2017 opinion or advisory letter by March 31, 2020, or
2. amending their individually designed plan by March 31, 2020.

Corrections may involve adding required provisions or correcting provisions that are defective. Employers that are self-correcting must restate the plan by the end of March 2020 and must have adopted a compliant plan document by Dec. 31, 2009. If these conditions do not apply, employers must use the IRS voluntary correction program.

Diehl discussed some case studies that illustrate different scenarios that must be corrected through the restatement process.

Case Study 1

A school district adopted a 403(b) plan in 2008. It never established a plan document. In 2012, based on the union contract, it added an employer contribution based on the employment contracts of certain individuals. In 2014, it began to contribute a post-employment contribution for terminated employees. And in 2017, they added hardship distributions — but only for qualified disaster distributions (QDDs).

In making the restatement for this plan, there must be a correction for the lack of a plan document for 2009. The school district needs to:

  • Gather all documents it can find, including board resolutions, benefit booklets, any enrollment forms that the participants execute, all custodial agreements and annuity contracts that were used in 2009 and any other documents that refer to the 403(b) plan.


  • Determine when the first contribution was made through payroll, since the employer had no clue about effective date. Or it can ask vendors when the first deposit was made.


  • Use the information in these documents to create a plan for 2009 memorializing what the plan would have stated in 2009.


  • Execute the plan with a current date with the initial effective date being that on which the first deposit was made.

The new IRS-approved plan would have a restatement date of Jan. 1, 2010.

Case Study 2

A 501(c)3 organization accepting only elective deferrals started a 403(b) plan in 2005. The organization adopted a non-ERISA 403(b) plan document in 2009 and the plan only accepted voluntary elective deferrals. It was self-administering the plan beginning in 2009. In 2018, the employer wants to amend to accept rollover contributions.

The employer contacted one of the vendors regarding what they should do. During the conversation, the following was revealed:

  • In 2013, the employer began contributing non-elective contributions and did not amend the document. In that year, it technically became subject to ERISA.


  • The employer had never heard of Form 5500.


  • The employer offered the plan to everyone. But then it looked at the new adoption agreement and saw that it included a 20-hour exclusion and concluded that its plan actually does exclude part-time employees.

The vendor then asked for plan descriptions and board resolutions to see what they did in operation and what employees received.

This employer has two options:

1. Establish a new ERISA plan that would have been effective in 2013 for those assets (following the “Paperclip Rule” and gathering all the documents one can might be an option if there is enough data, or EPCRS for a document failure).
2. Restate the current non-ERISA plan as an ERISA plan back to 2013.

“Either way,” Diehl said, the employer “must correct all errors that resulted, back to 2013.”

The employer also has to:

  • File the delinquent Forms 5500 for 2013-2016; 2017 will be timely.


  • Create the summary plan description for the ERISA plan.


  • Make sure all eligible employees received the employer contribution.


  • Restate the original non-ERISA plan as a frozen 403(b) to make it compliant. Once all of the failures are fixed, then permit employees to do a plan to plan transfer. Assuming the plan they adopted in 2009 satisfied the final 403(b) regulations at the time, the restatement date will be Jan. 1, 2010. Fill out the recap sheet for any amendments and changes that occurred on the non-ERISA side.


  • Correct the failure of not offering the plan to “under-30-hour” employees for lost deferrals plus lost earnings; this contribution goes into the plan as a QNEC (make sure the document permits QNECs!)


  • Decide whether this failure can be done as a self-correction or needs to be filed as a VCP filing with the IRS.


  • Look at deferral timing, remembering that one big difference between 403(b) and 401(k) plans is that there is no penalty for 403(b) employers for late deferrals — Form 5330 does not apply to them.


  • Remember the difference between ERISA and non-ERISA plans for timing and that ADP testing and top-heavy testing also do not apply.

Case Study 3

A school district started a 403(b) plan in 2009, basing it partly on the IRS model language that was provided in 2007 (see IRS Revenue Procedure 2007-71). The vendor that assisted in establishing the plan left out a section of the model language that referred to the maximum Internal Revenue Code Section 415 contribution amount.

The sample IRS language permitted rollovers from Roth IRAs — of course, not permitted under the statute or regulations. No other failures have occurred. This is a non-compliance failure in form. This can be corrected easily by restating on an IRS pre-approved plan.

The new plan will have the correct IRC Section 415 language in the plan and will not permit rollovers from Roth IRAs. The employer did not accept any rollovers from Roth IRAs, but if they permitted invalid Roth rollovers they would need to go back to a Roth IRA — corrective distribution plus earnings from the 403(b) and back to the Roth IRA.

Case Study 4

A charter school adopted a non-ERISA 403(b) plan. The school is a public educational institution under state law, and therefore adopted a K-12 plan document. The plan accepts elective deferrals, employer contributions, and mandatory employee contributions. Employer contributions are subject to a vesting schedule. Since this particular plan had to also be approved by the state, it seemed pretty clean for restatement purposes.

It is necessary to review state laws in certain cases, Diehl pointed out. In this case, the employer was coordinating the 403(b) with the provisions of the state plan.

Additional Restatement Issues

Diehl also identified additional issues that need to be considered concerning restatements:

ERISA Plans: There is a common misconception, she said, that ERISA 403(b) plans are fine and that the problems are only with K-12s — but “I can tell you from experience that is not the case!” she said.

Vendors: One may discover there are more than one may have thought; one also should consider whether or not they share information.

Individual contracts/agreements versus group contracts/agreements: Consider:

  • review by TPA or employer;


  • whether they satisfy the 403(b) regulations;


  • whether they have been updated;


  • that the deadline is March 31, 2020; and


  • that new contracts/agreements should be provided to participants no later than March 31, 2020.

Definition of compensation: Employers sometimes forget to tell the TPA there are exclusions.

Termination of the 403(b) plan: Still a problem if the plan contains custodial agreements.

New adoption agreements: Pre-populating a new adoption agreement from an old one may be a big disservice to a client unless it is reviewed provision by provision.

Other material that discusses the 403(b) plan: If needed, employers should review and update any other material that discusses the 403(b) plan, such as employee benefit handbooks, employment contracts, union contracts, and enrollment materials. And remember the administrative appendix and vendor attachment, which are a part of the plan.

Coordinating: Remember to coordinate with state 403(b) plans and plans for optional retirement programs. And it is critical to review custodial agreements and annuity contracts.

Amendments: Diehl also reminded attendees that now that there are IRS pre-approved plan amendments, from now on the rules will be the same as those for qualified plans.