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]