Category Archives: 403(b)

IRS Extends Deadline for 403(b) Plan Documents

Yesterday, the IRS issued Rev. Proc. 2014-28, extending the deadline for plan document providers to submit applications to the IRS for pre-approval of prototype and volume submitter plan documents from April 30, 2014 to April 30, 2015. While this 1-year extension may not seem like much at first read, it is monumental.

First, for the tiny part of the industry which actually writes 403(b) plan documents, this change signals a sea-changing event. Not only does Rev. Proc. 2014-28 give plan document providers a little more time to submit their proposed prototype and volume submitter plan documents to the IRS for opinion/advisory letters, it also reduces the number of required sponsors from 30 to 15, perhaps signaling that the IRS understands how difficult it has been for the plan document provider community to get educational institutions and non-profits to buy-in to the IRS idea that if they want the advantages gained by utilizing pre-approved prototype and volume submitter plan documents, then some of them must step forward and bear the burden of sponsoring those documents. Rev. Proc. 2014-28 doesn’t say why the IRS feels 15 sponsors is the more appropriate number of sponsors, or why the IRS decided not to completely eliminate this requirement. Rumor has it that the IRS did not eliminate this requirement in its entirety because the Service is concerned about being flooded with applications for 403(b) opinion/advisory letters for prototype and volume submitter plan documents. Because Rev. Proc. 2014-28 did not reduce or eliminate the fee to submit these applications, which starts at $14,000, it is doubtful that this rumor is true.

Second, for the rest of the industry, it is not what Rev. Proc. 2014-28 says but what it doesn’t say, which is important. Remember, when the IRS imposed the written plan document requirement on 403(b) plans with the Final 403(b) Regulations, the Service created a remedial amendment period for 403(b) plan documents. That remedial amendment period ends when the first restatement period for pre-approved 403(b) prototype and volume submitter plan documents ends, so moving the submission deadline also impacts this remedial amendment period, which is something Rev. Proc. 2014-28 does not address.

Additionally, Rev. Proc. 2014-28 does not discuss whether/if/when 403(b) plan document will follow the 6-year defined contribution restatement cycle set forth in Rev. Proc. 2007-44. For small educational institutions and non-profits concerned with the cost of implementing and maintaining a 403(b) plan, the cost of periodically restating the plan document is an important part of the conversation.

We will discuss these issues in detail in our upcoming live web seminar “403(b) Plan Document Update 2014” on Thursday, May 15, from 2pm to 3:40pm ET. The cost to attend is $50 for each individual. Individuals registered for our 16 Credit Hours for $195 seminar package can attend as part of their package at no additional charge. Group packages are available.

Today in ERISA History

Jan. 2, 2013 – The American Taxpayer Relief Act of 2012 (ATRA ’12), Public Law 112-240, is signed into law by President Barack Obama.

Code section 402A(c)(4) was added to the Internal Revenue Code by Section 2112 of the Small Business Jobs Act of 2010, Public Law 111-240. It permitted 401(k), 403(b) and 457(b) plans which already included a qualified Roth contribution program to allow employees to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan as long as certain conditions are met. These types of rollovers become known as in-plan Roth rollovers. One of those conditions is that the amount must satisfy the rules for distribution (it had to be an “otherwise distributable amount”) and it had to be a Code section 402(c)(4) eligible rollover distribution.

Section 902 of ATRA ’12 changes Code section 402A(c)(4) by adding subsection (E), which allows a plan with a qualified Roth contribution program to permit an in-plan Roth rollover of an amount that is not otherwise distributable under the plan. This change removes one of the conditions for in-plan Roth rollovers imposed by Section 2112 of the Small Business Jobs Act of 2010.

On Dec. 11, 2013, the IRS releases Notice 2013-74, providing guidance on the how section 902 of ATRA ’12, with new Code section 402A(c)(4)(E), expands in-plan Roth rollovers.

Today in ERISA History

July 26, 2007 – The IRS issues final regulations on Revised Regulations Concerning Section 403(b) Tax-Sheltered Annuity Contracts, also known as the Final 403(b) Regulations. They are a comprehensive update encompassing 40 years of guidance relating to 403(b) plans.

One of the key provisions added by the Final 403(b) Regulations was a written plan requirement for 403(b) plans. After several extensions of the deadline, the IRS finally required 403(b) plans to adopt a written plan document complying with the Final 403(b) Regulations by Dec. 31, 2009 which is effective on Jan. 1, 2009. Recognizing that one of the issues plan sponsors have with this requirement is that the only way to ensure their plan document complies with the Final 403(b) Regulations is to request a private letter ruling as the IRS has not pre-approved any 403(b) plan document, in Notice 2009-3, the IRS announces that it will be opening a pre-approved plan document program for 403(b) plans, adding individually designed 403(b) plans to the 5-year restatement cycle contained in Rev. Proc. 2007-44, creating a determination letter program for 403(b) plans and adding more 403(b) corrections to the IRS’ EPCRS program. In early 2012, the IRS informally announced that the 403(b) pre-approved plan document program and the changes to EPCRS are coming in the next several months.

On Oct. 26, 2010, the IRS published corrections to the 2007 Final 403(b) Regulations.

Today in ERISA History

July 24, 2007 – The Dept. of Labor issues Field Assistance Bulletin 2007-02 addressing ERISA coverage of 403(b) Tax-Sheltered Annuity Programs and providing guidance to the DOL’s national and regional offices about the extent to which compliance with the IRS’ newly issued Final 403(b) Regulations would cause employers to exceed the limitations on employer involvement permitted under Labor Reg. 2510.3-2(f) for non-ERISA plans.

Labor Reg. 2510.3-2(f) says that 403(b) plans are not subject to Title I of ERISA if:

    1. the participation of the employees is completely voluntary;
    2. all rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or the authorized representative of such employee or beneficiary;
    3. the involvement of the employer is limited to certain optional specified activities; and
    4. the employer receive no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer’s duties pursuant to the salary reduction agreements.

The safe harbor allows employers to engage in a range of activities to facilitate the operation of the plan without removing the plan from the safe harbor of Labor Reg. 2510.3-2(f). Those activities can include:

    1. permitting annuity contractors, including agents or brokers who offer annuity contracts or make available custodial accounts, to publicize their products;
    2. request information concerning proposed funding media, products, or annuity contractors;
    3. compile such information to facilitate review and analysis by employees;
    4. entering into salary reduction agreements and collecting annuity or custodial account considerations required by the agreements, remitting them to annuity contractors, and maintaining records of such collections;
    5. holding one or more group annuity contracts in the employer’s name covering its employees and exercising rights as representative of its employees under the contract, at least with respect to amendments of the contract; and
    6. limiting funding media or products available to employees, or annuity contractors who may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances.

The IRS’ Final 403(b) Regulations imposed a number of requirements on employers sponsoring a 403(b) plan, including maintaining the plan pursuant to a written plan. In Field Assistance Bulletin 2007-02, the DOL addressed what activities the plan sponsor could engage in to comply with the IRS’ Final 403(b) Regulations without becoming subject to Title I of ERISA.

In Field Assistance Bulletin 2007-02, the DOL said that a non-ERISA plan could stay within the safe harbor of Labor Reg. 2510.3-2(f) while still complying with the written plan requirement of the IRS’ Final 403(b) Regulations. The DOL envisioned the written plan for a non-ERISA safe harbor plan would consist largely of separate contracts and related documents supplied by the annuity providers and account trustees or custodians.

The employer could adopt a single document which would coordinate administration among different issuers, and which addressed tax matters that apply, including the universal availability requirement of Internal Revenue Code section 403(b)(12)(A)(ii), without reference to a particular contract or account, and still be within the safe harbor. Such plan document should identify the parties that are responsible for administrative functions, including those related to tax compliance, and should correctly describe the employer’s limited role and allocate discretionary determinations to the annuity provider or participant or other third party selected by the provider or the participant. The employer is permitted to periodically review the documents making up the plan for conflicting provisions and to ensure compliance with the Code and regulations.

Today in ERISA History

July 20, 2009 – The Dept. of Labor issues Field Assistance Bulletin 2009-02, providing guidance on Form 5500 annual reporting requirements for 403(b) tax-sheltered annuity programs for contracts issued before Jan. 1, 2009.

In 2007, the IRS issued the Final 403(b) Regulations and the DOL published a revised Form 5500 and related regulations, eliminating limited reporting for 403(b) plans and requiring ERISA 403(b) plans with 100 or more participants to file audited financial statements with their Form 5500 filings. Recognizing that administrators could be unable to identify all participant contracts and accounts issued before Jan. 1, 2009, the DOL provided transitional relief for the 2009 plan year Form 5500 filings as long as certain conditions were met.

Treasury Official Discusses Annuities for 401(k) Plans

In Mark Iwry: Bringing Annuities to 401(k)s, Ben Steverman of Businessweek asks J. Mark Iwry, senior adviser to the Secretary of the Treasury and deputy assistant secretary for retirement and health policy, a series of Q&As about the new proposed regulations on annuities in 401(k) plans. In the article, published on April 17, 2012, Mr. Iwry says that by allowing 401(k) plan to include annuities as one of the investment options available to participants, the plan will be able to help participants manage “longevity risk” – the risk that they will outlive the account balance in their retirement plan.

The proposed regulations, Longevity Annuity Contracts, were released by the IRS on Feb. 3, 2012. They permit tax-qualified defined contribution plans, including 401(k), 403(b), and govt. 457 plans, along with Code section 408 IRAs, to purchase longevity annuity contracts. The IRS requests written comments about these proposed regulations by May 3, 2012.

Today in ERISA History

March 23, 2009 – The IRS issues Final Regulations on Automatic Contribution Arrangements. Section 902 of the Pension Protection Act of 2006 (PPA ’06) added Code section 401(k)(13), 401(m)(12) and 414(w), providing for automatic enrollment in 401(k), 403(b) and 457(b) plans, including Qualified Automatic Contribution Arrangements (QACA) and Eligible Automatic Contribution Arrangements (EACA). Section 109(b) of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) subsequently modified some of the provisions contained in PPA ’06 on automatic contribution arrangements. These regulations contain guidance on how plan sponsors implement automatic contribution arrangements and when employees must be notified.

Today in ERISA History

March 16, 2004 – the IRS issues proposed regulations on the Exclusion of Employees of 501(c)(3) Organizations in 401(k) and 401(m) Plans. These proposed regulation permit, in certain circumstances, for employees of a tax-exempt organization described in Code section 501(c)(3) to be excluded for the purpose of testing whether a section 401(k) plan (or a section 401(m) plan that is provided under the same general arrangement as the section 401(k) plan of the employer) meets the requirements for minimum coverage contained in Code section 410(b).

The proposed regulations add subsection (g) to Treas. Reg. 1.410(b)-6. As proposed, Treas. Reg. 1.410(b)-6(g) states:

    1.410(b)–6 Excludable employees.
    (g) Employees of certain governmental or tax-exempt entities. For purposes of testing either a section 401(k) plan or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, an employer may treat as excludable those employees described in paragraphs (g)(1) and (2) of this section.
      (1) Employees of governmental entities. Employees of governmental entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by section 401(k)(4)(B)(ii) benefit under the plan for the plan year.
      (2) Employees of tax-exempt entities. Employees of a tax-exempt organization described in section 501(c)(3) who are eligible to make salary reduction contributions under a section 403(b) plan may be treated as excludable employees if —
        (i) No employee of the organization is eligible to participate in the section 401(k) or section 401(m) plan; and
        (ii) At least 95 percent of the employees of the employer who are not employees of the organization are eligible to participate in the section 401(k) or section 401(m) plan.

The principal authors of the proposed regs. are R. Lisa Mojiri-Azad and Stacey Grundman of the IRS Office of the Division counsel / Associate Chief Counsel (Tax Exempt and Government Entities).

These regulations are finalized on July 21, 2006, T.D. 9275, 71 F.R. 41359. The principal authors of the final regulations are Linda L. Conway and Michael P. Brewer of he Office of the Division Counsel / Associate Chief Counsel (Tax Exempt and Government Entities).

NEA Releases Suggested Disclosure Form for 403(b) Plans

A group calling themselves the Joint 403(b) Taskforce has issued a 10-page 403(b) model Disclosure Form.

The first 2 pages of the form are in checklist format. The first page focuses on the type of educational services provide to the participants by telephone, mail, face-to-face or online interactions; whether account access, loan processing, monthly and quarterly statements are provided by telephone, mail or online, and what the charge is for TPA Fees, Distribution Fees, Loan Origination Fees and Loan Maintenance Fees. It is interesting that of the 4 fees listed on the first page of the checklist, information on 3 of the 4 (Distribution Fees, Loan Origination Fees and Loan Maintenance Fees) should already have been provided to the participants in the Summary Plan Description (SPD) to the plan document. Missing from the checklist are other similar fees, such as plan document fees, amendment fees, and annual compliance fees.

The second page of the checklist contains information about Front End Charges, Surrender Charges, Contract Fee and Mortality & Expense Fees for Annuity Products; and Front End Charges, Surrender Charges, Administrative Fees, Custodial Fees, and Wrap Fees for Custodial Accounts.

The final part of page 2 of the checklist states that it is for “Payments to Third Parties” which are not charged to participants accounts/annuities, including Commissions and/or Other Marketing or Service Payments Directly Related to the Purchase of or Deposits in annuity and custodial products and payments to other third parties related to endorsements, marketing or promoting annuity products.

This suggested 403(b) Disclosure Form does not identify who wrote it other than stating that it is a “Product of the ASBO, NEA & NTSAA Joint 403(b) Taskforce”. Late last year, the American Society of Pension Professionals & Actuaries (ASPPA) announced that they had formed “an industry taskforce dedicated to increasing transparency in the 403(b) marketplace” with the National Tax Sheltered Accounts Association (NTSAA). That press release said that partnering in the taskforce are the National Education Association (NEA) and the Association of School Business Officials (ASBO). The individuals particpating in the taskforce on behalf of their organizations were not identified.

NTSAA was founded in 1989 and combined operations with ASPPA in January of 2010, operating as “a semi-autonomous division under ASPPA”.

This disclosure form should not be confused with Model or Sample forms created by the IRS, DOL and PBGC for disclosing fees and other information. From time to time, the IRS, DOL and PBGC create and distribute Model or Sample forms and amendments whose use provides relief from certain compliance iniatives. Since this suggested disclosure form was not issued by the IRS, DOL or PBGC, it does not provide the same relief as a Model or Sample form issued by the IRS, DOL or PBGC.

403(b) Prototype Program Excludes Plans with Vesting Schedules

Yesterday, I attended the IRS’ 403(b) Phone Forum featuring IRS Senior Tax Law Specialist Robert Architect. One of the topics briefly discussed by Mr. Architect was the new prototype program for 403(b) plans, as stated in Announcement 2009-34. One of the surprising parts of Announcement 2009-34 is that 403(b) prototypes approved by the IRS will not be permitted to contain graduating vesting schedules for matching or non-elective contributions. Of course, elective deferrals are always 100% vested, and thus elective deferrals are not affected by this decision.

The reason behind this strange vesting prohibition for pre-approved 403(b) prototypes is given in Announcement 2009-34. Section 3.06 states:

    “.06 One of the Service’s goals in establishing the § 403(b) prototype plan program is to ensure that § 403(b) prototype plans will be broadly suitable for the majority of eligible employers. The Service does not intend that prototype plans be suitable for every eligible employer or every circumstance. Thus, the revenue procedure does not permit § 403(b) prototype plans to include certain provisions that the Service believes do not apply to most eligible employers, such as vesting schedules and provisions applicable only to churches and organizations described in § 3121(w)(3). See section 5.06 and section 9.”

Then, in Section 5.06, which provides the provisions required in every pre-approved 403(b) prototype, Announcement 2009-34 states:

    “.06 Every § 403(b) prototype plan must provide for full and immediate vesting of all contributions under the plan.”

Graduating vesting provisions are not new, and are permitted in the other IRS defined contribution prototype programs, so the IRS has experience, and sample language, for including vesting provisions in pre-approved prototype plans.

This does not mean that 403(b) plans must provide full and immediate vesting for all contributions under the plan. It just means that employers who sponsor a 403(b) plan and add a vesting schedule to a pre-approved prototype plan will change the status of the plan from pre-approved to individually designed.

One of the things at stake here with the IRS’ decision not to permit graduating vesting schedules in pre-approved 403(b) plans is the cost for a determination letter. For employers using a pre-approved 403(b) plan, the employer has reliance on the opinion letter issued to the plan, and does not need to apply for a determination letter. If the employer, for whatever reason, decides to obtain a determination letter for that plan, the employer will pay a fee of $300 to the IRS when filing that determination letter application using Form 5307 (according to the most recent Form 8717).

If the employer adds a graduating vesting schedule to that pre-approved prototype plan, it changes the plan to an individually designed plan. As such, the employer has no reliance on the opinion letter issued to the plan, and will pay a fee of $1,000 to the IRS for a determination letter for that plan using Form 5300. If the determination letter application includes Demo 5 or Demo 6, the employer will pay a fee of $1,800 for that determination letter.

The IRS is accepting comments until June 1, 2009, on Announcement 2009-34. Hopefully, there will be sufficient comment on the vesting issue that the IRS will reconsider this decision. If you want to submit a comment to the IRS about this vesting issue, Announcement 2009-34 contains specific instructions on how to submit a comment.

[tag]pension protection act, ppa, 403(b), Announcement 2009-34, vesting, ERISA[/tag]