On April 14, 2009, the Internal Revenue Service (IRS) published Announcement 2009-34 (Announcement) describing its intent to establish a program that would allow for pre-approval of prototype plans under Internal Revenue Code (Code) Section 403(b). The IRS also provided sample plan language on its website for use in drafting 403(b) prototype plans. The Announcement requests comments by June 1, 2009, on a proposed revenue procedure that would implement the 403(b) prototype plan regime and also requests that each vendor that expects to establish a prototype plan notify the IRS of its intent to do so by June 1, 2009. Once the process for establishing a 403(b) prototype plan is finalized, vendors can establish such arrangements and offer them to adopting employers. A prototype plan is an attractive option for employers with a simple 403(b) plan design that want to ease their administrative burden while assuring that their plans continue to meet IRS plan qualification requirements.
A prototype plan is a plan that is made available by a vendor for adoption by one or more employers. All prototype plans consist of a basic plan document and an adoption agreement. The basic plan document is the portion of the plan that contains the underlying nonelective provisions of the plan. The adoption agreement is the component of the plan that contains the options that can be selected by an adopting employer. Historically, prototype plans have been available to sponsors of other types of qualified retirement plans, such as 401(k) plans, but were unavailable to sponsors of 403(b) plans.
Typically a prototype plan sponsor will submit an application to the IRS consisting of the documents comprising the prototype plan requesting that an opinion letter be issued on the materials submitted. As long as an employer does not deviate from the pre-approved language provided by the vendor, the employer is assured that the terms of the plan satisfy the “form” requirements of the Code.
Proposed Revenue Procedure
While only in proposed form at this point, the revenue procedure accompanying the Announcement provides insights into the likely approach to the prototype program that will eventually be adopted by the IRS. The revenue procedure describes the opinion letter program for 403(b) prototype plans and states that the program will be governed by rules similar to those already applicable to 401(k) prototype plans, adjusted for differences that are unique to 403(b) plans.
The Announcement states that prototype plans may be established as standardized plans or nonstandardized plans. Standardized plans only allow for employee elective deferrals alone or elective deferrals and employer contributions that satisfy uniform coverage and contribution requirements. Nonstandardized plans are plans that fail to meet these requirements. If an employer adopts a nonstandardized plan, it may generally rely on the prototype plan’s opinion letter with respect to the plan documents, but must separately satisfy nondiscrimination and coverage testing under Internal Revenue Code Section 401(a)(4) and 410(b). The sponsoring employer can, but is not required to, request an individual determination letter as to the nondiscrimination and coverage testing. The IRS intends to publish guidance on this determination letter process in the future.
The proposed revenue procedure establishes the mandatory provisions that must be included in every 403(b) prototype plan. These requirements reflect both legally required elements of a 403(b) plan as well as certain elements that are unique to the operation of a prototype plan, including the requirement that the prototype provider be allowed to amend the 403(b) prototype plan on behalf of each participating employer. Some of the mandatory requirements are as follows:
- Terms of the basic plan document and adoption agreement must trump inconsistent provisions of investment arrangements offered under the plan.
The plan must contain all material terms and conditions for eligibility.
The plan must satisfy the universal availability requirement regarding employee deferrals.
The plan must limit compensation taken into account to the Code Section 401(a)(17) limit (currently $245,000).
Non-church and government sponsors must ensure that the plan satisfies the requirements of Code Section 401(m).
All contributions under the plan must be 100 percent vested at all times.
The plan must set forth the terms governing hardship distributions, loans, plan-to-plan transfers, contract-to-contract exchanges and rollovers, if applicable.
All 403(b) plans maintained by an employer and its related employers must be aggregated for Code Section 415 limit purposes.
If applicable, the adoption agreement must specify if the plan is a governmental plan, a nonelecting church plan or a plan maintained by a 501(c)(3) organization.
Prototype plans will likely be available to employers sponsoring 403(b) plans that are exempt from Title I of the Employer Retirement Income Security Act of 1974, as amended (ERISA), because of the sponsoring employer’s limited involvement in the administration and operation of the plan. It is important that any employer electing to convert an existing individually sponsored non-ERISA 403(b) plan to a prototype plan, or otherwise electing to adopt a prototype plan, and in either event the employer desires to maintain such plan as a non-ERISA plan, continue to abide by U.S. Department of Labor guidance and regulations to ensure that its plan does not become subject to Title I of ERISA. These requirements will not change regardless of whether the employer’s 403(b) plan is individually designed or a prototype plan.
All employers electing to adopt a prototype 403(b) plan should also review the terms of their prototype plan with the assistance of counsel, as needed, to ensure that the various requirements of the finalized revenue procedure are met.
Implications for Employers
In Notice 2009-3, the IRS delayed the implementation of certain requirements of the final 403(b) regulations that were otherwise effective as of January 1, 2009, and most notably allowed sponsors of such arrangements to delay the adoption of a written plan document until as late as December 31, 2009. However, sponsors of 403(b) plans must ensure that their plans are operationally compliant with the final regulations, effective as of January 1, 2009, and the establishment of the 403(b) prototype program in no way alters this compliance requirement, even if the sponsor of an existing plan adopts a 403(b) prototype plan during 2009 (assuming the program is implemented by December 31, 2009). Therefore, all sponsors of individually designed 403(b) plans should continue to ensure that their plans comply in operation with the final 403(b) regulations.
During the review period for the proposed revenue procedure, sponsors of 403(b) plans should evaluate their plan designs to determine whether their plan is suited to establishment as, or conversion to, a prototype plan. Plans that provide for only employee deferrals or employee deferrals with an employer contribution may be well suited to the prototype regime. If a plan sponsor determines that its 403(b) plan is suited to the regime, it should determine whether its current vendor will provide a 403(b) prototype plan and determine whether the current vendor is the appropriate provider of such an arrangement. Thereafter, the sponsor can work with a selected vendor to implement its 403(b) prototype plan.
Those sponsors not electing to adopt a 403(b) prototype plan or that are otherwise unable to do so because of a complex plan design or for other reasons should continue to ensure compliance with the final 403(b) regulations, and should continue to monitor guidance from the IRS to determine whether the IRS intends to approve 403(b) plans via a program similar to the determination letter program in place for 401(k) plans. Announcement 2009-34 reiterates the IRS’s intent to establish a determination letter program for individually designed 403(b) plans, but, as with prior guidance, the Announcement does not specify a date as of which such program will be established.