In 2007, the Internal Revenue Service finalized the first comprehensive revision of the regulations governing 403(b) tax-deferred annuity plans in over 40 years.  These final regulations generally went into effect on Jan. 1, 2009.  A key provision of the final regulations is that 403(b) plans must now have written plan documents.  

Recently, in Announcement 2009-34, the IRS issued a draft revenue procedure that would establish a prototype plan approval program for 403(b) plan documents.  This process would generally parallel the opinion letter program for master and prototype tax-qualified defined benefit and defined contribution plans.

Checks and balances

The 403(b) prototype plan program is not expected to be open for filings until later in 2009.  403(b) prototype plan submissions will be required to be submitted under the program no earlier than March 15, 2010, although a later deadline may apply.  The IRS intends to establish an individually designed 403(b) plan determination letter program after the prototype program is implemented.

The proposed prototype program would establish a remedial amendment period for amending 403(b) plans to bring them into compliance with applicable legal requirements governing the form of a plan document.  

Notably, although the proposed revenue procedure addresses the 403(b) prototype program, the remedial amendment period provisions also provide for a remedial amendment period for individually designed plans that file under the 403(b) plan determination letter program that will be implemented in the future.  

This 403(b) remedial amendment period is not the same as the remedial amendment for tax-qualified plans because Internal Revenue Code section 401(b), which generally provides for remedial amendment periods, does not apply to 403(b) plans.

The proposed 403(b) remedial amendment period would generally run from Jan. 1, 2010.  This remedial amendment period would follow the expiration of the transition relief in Notice 2009-3, which requires a plan document be adopted by Dec. 31, 2009.  

The retroactive amendment ability under the proposed prototype program does not relieve a plan sponsor of its duty to adopt a plan document by Dec. 31, 2009 under Notice 2009-3 or, in the case of ERISA 403(b) plans, to have a written plan document in place at all times.

Key features

The proposed prototype program provides that there are two key documents in a prototype plan – a basic plan document and an adoption agreement.  The 403(b) prototype plan program will only take into account these two documents – insurance contract and custodial account provisions will not be considered.  

Multiple adoption agreements (e.g., one for simple elective deferral plans and one for plans with employer contributions) can be used with the same basic plan document.  Key additional features of a 403(b) prototype plan include:

•    Vesting: A 403(b) prototype plan must not apply a vesting schedule to employer contributions of any kind.  This rule applies to all types of 403(b) plans – including governmental and church plans not subject to ERISA vesting rules.  A number of comments have suggested that the IRS modify this position when the prototype program is finalized.

•    Conflicts between Plan Documents and Funding Arrangements: A 403(b) prototype plan must provide that its terms have control over the inconsistent terms of any funding arrangement, such as an annuity contract or custodial account.  To the extent that a plan sponsor is using a single vendor who has provided a prototype plan, this requirement is likely to be of limited impact.

•    Plan Administration: A 403(b) prototype plan must identify who will fulfill the various plan administrator functions required under the final 403(b) regulations.

•    List of Vendors: A 403(b) prototype plan must either identify the plan's funding arrangements or refer to a list separately maintained by a plan administrator.

•    Prototype Sponsor Rights and Duties: A prototype sponsor must have the right to amend a 403(b) prototype plan.  Further, a prototype sponsor will have an ongoing duty to amend its plan for changes in applicable law and to communicate these changes to plan sponsors that adopt its plan (including procedures to document compliance with these requirements).

•    Types of 403(b) Prototype Plans.  There are two types of 403(b) prototype plans: standardized and non-standardized.  Standardized plans are employee deferral only (including Roth 403(b) deferrals) or have employer contributions that satisfy the nondiscrimination rules' uniform coverage and contribution rules. Non-standardized plans are plans with employer contributions that do not satisfy the uniform coverage and contribution rules. Non-standardized plans will need to submit individual determination letters (when available) if they wish to obtain a ruling that they satisfy the contribution and coverage nondiscrimination rules.

As noted above, the prototype plan program is currently in proposed form and may change in its final form.  As such, sponsors, administrators and providers may want to wait for the final version of the program to be adopted before proceeding with steps to participate in or rely on the program.

David N. Levine can be reached at dnl@groom.com.   

Related coverage:
Advisers set to benefit from the transformation of 403(b) plans

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