Churches and other nonprofits that offer their workers retirement plans with unique design elements are most likely to benefit from upcoming Internal Revenue Service guidance allowing plans tailored to a single employer to seek approval letters from the agency.
The upcoming guidance will for the first time allow so-called individually designed plans to seek determination letters from the agency, an IRS official said during a recent conference. Determination letters state the agency's findings on the form of a retirement plan.
Currently, sponsors of plans organized under Internal Revenue Code Section 403(b), used by some nonprofits and schools, can only seek approval letters from the IRS if they adopt a preapproved plan.
While adopting preapproved plans likely works for many 403(b) plan sponsors, some 403(b) plan sponsors of and participants in outlier plans with provisions that don't fit comfortably into preapproved documents could benefit from their plans getting letters. The change could also bring more plans into compliance with tax laws and regulations.
Denominational church plans, for example, can have complicated provisions, including regarding termination of employment and asset transfers, that make adoption of preapproved plans difficult, according to David Powell of Groom Law Group. Some larger and older plans, especially ones that are main 403(b) plans of organizations and have unique provisions or structures, are hard to fit into preapproved plans, Powell said. State-sponsored 403(b) plans can also have provisions that don't fit into standardized documents, he said. Powell said such plans likely represent a "small number of plans with a significant number of participants."...
...Sponsors of 403(b) plans have already significantly moved toward preapproved plans since the agency announced its preapproved program for 403(b) plans in a 2013 revenue procedure, said Denise Pino Erwin of Bryan Cave Leighton Paisner LLP.
"It seems that the tide is unlikely to turn again in the direction of individually designed plans," she said.
Still, for some employers and for plan participants, the determination letters could be helpful. Jorge Leon of Michael Best & Friedrich LLP said a worker at an organization that didn't get a determination letter may need their employer to represent that the plan is tax-compliant in order to take distributions or roll over funds. Leon also noted that employers can't rely on the determination letter for their preapproved 403(b) plan if they make custom changes to a preapproved plan, which converts it to an individually designed plan.
Public schools and some charitable entities with tax-exempt status under Section 501(c)(3) are eligible to offer 403(b) plans. Workers can contribute to accounts on a tax-deferred basis and the plan can offer designated Roth accounts, contributions to which are taxed but distributions from which are tax-free, per the IRS.
Regarding the timing of the guidance rollout, Leon said a "top priority" would be the agency committing to a timeline for finalizing whatever guidance vehicle will implement the determination letter program.
Levine did not provide a timeline for the release of the guidance in his remarks.
Preapproved plan document submissions for the second remedial amendment cycle have to be filed by May 1, 2023. If the individually designed determination letter process were available by then, denominational church plan sponsors with lots of participating employers might want to consider that option, Powell said.
For his part, though, Oringer said he's unsure whether there's much urgency on granting access to the determination letter program to individually designed 403(b) plans.
"The IRS has long recognized in a lot of its rulemaking that special considerations arise in connection with not-for-profits," he said. "These programs evolve over time — you don't necessarily get them right the first time. I think the IRS would be extremely focused on trying to roll something out that is pretty darn close to the mark, that works for all elements of the market."
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