In case you missed it, a couple months ago, the IRS quietly issued opinion or advisory letters to 403(b) plan sponsors seeking approval of their Prototype (P) and Volume Submitter (VS) plans. Entities seeking letters approving the tax-qualified status of their plans (for the first time in IRS history) had begun filing for approval back in July 2013. As a quick reminder, the IRS did not open the standard determination letter program to 403(b) plans. However, beginning in 2013, this changed for pre-approved plans. As you may know, an employer that adopts a 403(b) pre-approved plan generally has assurance that the form of its plan document complies with Internal Revenue Code (IRC) Section 403(b). [The determination letter program does not protect against operational/administrative errors.]
Since the opening of the 403(b) P and VS submission window in 2013, the IRS had largely been entirely silent on if, when, and to whom it would issue opinion or advisory letters covering the final regulations under IRC 403(b), which were issued in 2007 (and became effective in 2009).
After this period of silence, the IRS came to life and issued almost all of the letters on the same date, March 31, 2017. A list of 403(b) P and VS plans that have been issued opinion and advisory letters is posted on the IRS website. As of the date of this alert, the date on the most current publicly available list is May 28, 2017; letters/opinions may have been issued in the interim.
An employer eligible to adopt a 403(b) plan (generally a non-profit) can retroactively correct any “form defects” in its written 403(b) plan in order to satisfy the written plan document requirement of the 2007 final regulations by adopting a P or VS plan with an opinion or advisory letter (i.e., an approved P or VS plan) or otherwise amending its plan in the case of an individually designed plan by the third anniversary of the first wave of letters: March 31, 2020.
A 403(b) plan sponsor that believes its provider has made available a pre-approved plan (P or VS) document should confirm with its provider whether the provider has received an opinion or advisory letter. If the sponsor did not receive or is not pursuing such pre-approval from the government, the 403(b) plan sponsor might be best-served to consider whether it would benefit from moving to a plan that has received such approval.
By restating its plan in the form of an IRS pre-approved plan, the 403(b) plan sponsor/employer can rely on the fact that the provisions in the pre-approved plan are compliant with IRS regulations, and therefore protected from taxation. Similarly, in the event of an IRS audit, use of a pre-approved plan means that the IRS will not need to verify whether the plan’s terms meet the technical legal requirements.
While Q1 of 2020 is still off in the distance, given the timing and effort required to consider whether it makes sense to vet new providers and/or transfer the plan to a new provider, 403(b) plan sponsors should not delay too long. Employers with 403(b) plans should not miss this window to avail themselves of a clean slate for their plan document.