The US Internal Revenue Service (IRS) recently issued Revenue Procedure 2022-40 to expand the IRS’s determination letter program to include individually designed 403(b) plans. Previously, the IRS’s determination letter program was only available to individually designed 401(a) retirement plans—such as pension plans and 401(k) plans.
The availability of the determination letter program to individually designed 403(b) plans is a significant development for plan sponsors, such as tax exempt organizations that sponsor 403(b) plans. Most 403(b) plans have been subject to a written plan document requirement since 2009. While the IRS has sponsored a program to issue opinion letters for preapproved 403(b) plan documents offered by vendors to plan sponsors, until now, there was no opportunity for the sponsor of an individually designed 403(b) plan to obtain a favorable determination from the IRS that the plan document satisfied the requirements of Section 403(b) of the Internal Revenue Code.
Under the expanded program as set forth in Revenue Procedure 2022-40,[1] sponsors of individually designed 403(b) plans will now be available to submit a determination letter application: (1) for an initial plan determination, (2) for the plan’s termination, and (3) in certain other circumstances specified by the IRS in future guidance. The program opens June 1, 2023.
Initial Plan Determination
Current sponsors of individually designed 403(b) plans may submit determination letter applications on IRS Form 5300, Application for Determination for Employee Benefit Plan, for an initial determination of a plan’s tax-qualified status staggered over three dates (June 1, 2023, June 1, 2024, and June 1, 2025), depending on the last digit of a plan sponsor’s employer identification number (EIN), as follows:
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If the EIN of the plan sponsor ends in: |
A determination letter application may be submitted beginning on: |
|
1, 2, or 3 |
June 1, 2023 |
|
4, 5, 6, or 7 |
June 1, 2024 |
|
8, 9, or 0 |
June 1, 2025 |
Since sponsors of individually designed 403(b) plans have not previously been eligible to submit those plans on Form 5300, virtually all individually designed 403(b) plans will be eligible to submit for an initial determination under the expanded program, regardless of how long they have been in effect.
Determination Upon Plan Termination
Sponsors of individually designed 403(b) plans may also submit applications on IRS Form 5310, Application for Determination Upon Termination, for a determination letter upon the plan’s termination any time on or after June 1, 2023. Plan sponsors do not need to follow the EIN-driven schedule described above for plan terminations.
An application for a favorable determination letter upon a plan’s termination must be submitted no later than the later of (1) one year from the effective date of the termination; or (2) one year from the date on which the action terminating the plan is taken.
Notwithstanding the foregoing, if assets have been fully distributed from a terminating plan, the application must be filed within 12 months of the distribution.
Determination Upon Plan Merger
The expanded determination letter program currently does not provide sponsors of individually designed 403(b) plans with the opportunity to submit a determination letter application upon the merger of 403(b) plans resulting from corporate transactions between unrelated entities.
Morgan Lewis Observation: The IRS determination letter program currently permits sponsors of individually designed 401(a) retirement plans (such as pension and 401(k) plans) to submit a determination letter application following certain plan mergers that result from corporate transactions between unrelated entities. At least for now, the IRS has declined to extend that same opportunity to individually designed 403(b) plans. While corporate transactions and plan mergers are perhaps less common for 403(b) plans and tax-exempt plan sponsors, they certainly do occur (for example, mergers and consolidations regularly occur with tax-exempt healthcare organizations). Hopefully, the IRS eventually would extend the same plan merger opportunity to individually designed 403(b) plans.
Notice to Interested Parties
As with individually designed 401(a) retirement plans, 403(b) plan sponsors must notify interested parties (such as participants, beneficiaries, and alternate payees) that a favorable determination application will be filed on either Form 5300 or Form 5310 and provide such parties with an opportunity to comment.
Scope of Review of Determination Letter Application
The IRS will review individually designed 403(b) plans for those 403(b) requirements that are in effect, or that have been included on a Required Amendment List (see below), on or before the last day of the second calendar year preceding the year in which the determination letter application is submitted (or, in the case of a plan termination, all of those requirements that are in effect as of the effective date of the plan’s termination). As with individually designed 401(a) retirement plans, individually designed 403(b) plans must be restated as part of the determination letter application, unless the submission is for a terminating plan.
The IRS annually publishes a “Required Amendment List” that identifies the changes in the qualification requirements applicable to Section 401(a) plans and changes to Section 403(b) plan requirements. In general, an item is included on a Required Amendment List after the IRS has issued guidance with respect to the item (either in the form of regulations or other published guidance).
Remedial Amendment Period
Revenue Procedure 2016-37 introduced the Required Amendment List, which sets forth an annual list of qualification requirements and the amendment deadline for individually designed 401(a) retirement plans to retroactively correct any disqualifying plan provisions that arise as the result of a change in qualification requirements.
Similarly, a system of recurring remedial amendment periods that would permit plan sponsors to retroactively correct form defects first occurring after June 30, 2020 (extended by IRS Notice 2020-35 from March 31, 2020) under individually designed 403(b) plans and 403(b) plan amendment deadlines were both first established under Revenue Procedure 2019-39.
For this purpose, a “form defect” occurring on or after July 1, 2020 is defined under Revenue Procedure 2022-40 as (1) a provision of a new plan, the absence of a provision from a new plan, or an amendment to an existing plan that causes the form of the plan to fail to satisfy the requirements of Section 403(b) of the Code applicable as of the date the plan or amendment is first made effective; (2) a plan provision that (a) results in the failure of the form of the plan to satisfy the 403(b) requirements by reason of a change in those requirements; or (b) is integral to a 403(b) requirement described in (a); or (3) the absence from a plan of a provision required by (or, if applicable, integral to) a change in the 403(b) requirements.
The “remedial amendment period” for a 403(b) plan is the period during which an eligible employer maintaining a 403(b) plan may correct a form defect in its plan retroactive to the beginning of the applicable period for (1) a new plan; (2) an existing plan; or (3) a provision that fails to satisfy the 403(b) requirements due to a change in those requirements (or is integral to a 403(b) requirement that has been changed). Unless the period is shortened by the termination of the plan, the end of the remedial amendment period for a non-governmental individually designed 403(b) plan is the last day of the second calendar year following the calendar year in which (a) the plan is first put into effect (for a new plan); or (b) an amendment to the plan is adopted or effective, whichever is later (for an existing plan). In the case of a change in the 403(b) plan requirements, the last day of the remedial amendment period is the last day of the second calendar year that begins after the issuance of the Required Amendments List in which the change occurs.[2]
The amendment deadline for a discretionary amendment to a non-governmental individually designed 403(b) plan is the last day of the plan year in which the amendment is put into effect operationally.[3]
The expansion of the program to individually designed 403(b) plans is something that has been long-awaited by 403(b) plan sponsors and retirement plan practitioners. While determination letters are optional and not required by law, plan sponsors often seek them to gain the comfort that comes from the IRS reviewing and approving the form of the plan documents. A determination letter may also provide comfort to third parties (e.g., plan or governmental auditors or transaction counterparties) that the form of the plan document satisfies the applicable 403(b) plan requirements. In addition, a determination letter is necessary to take advantage of certain correction opportunities that are available under the IRS’s Employee Plans Compliance Resolution System (EPCRS)—the IRS’s formal correction program.
However, for a long-standing 403(b) plan (many of which have been around for decades), the IRS’s scrutiny of the plan during the determination letter review process may reveal long-standing flaws in the plan’s design. If these flaws have existed for an extended period of time, they likely will fall outside the remedial amendment period described above, and it may not be possible to self-correct the errors or correct the errors for all periods through a retroactive amendment. In these situations, it may be necessary for a plan sponsor to correct the errors through a submission to the IRS through the “voluntary correction program” component of EPCRS.
Thus, plan sponsors should work with experienced legal counsel to conduct a full review of their individually designed 403(b) plan before submitting the plan for a determination letter. To the extent a form defect is discovered, the plan sponsor, teaming with legal counsel, can determine the best approach for addressing it.
In addition, it should be noted that the annual revenue procedure issued by the IRS to describe the favorable determination letter program has not yet been revised to reflect the submission of individually designed 403(b) plans. The current revenue procedure states that “If a plan did not receive a prior favorable determination letter, all plan documents and amendments must be submitted. EP Determinations [the IRS division responsible for reviewing determination letter applications] has the discretion to request copies of any other amendments during its review of a plan.”
It will be interesting to see how the IRS will apply this requirement in the context of an individually designed 403(b) plan that has been in existence for decades. It seems unlikely that the IRS would require submission of all plan documents and amendments since the plan’s original adoption, but it is possible that the IRS may require some amount of historical plan documentation.
The expansion of the IRS determination letter program to include individually designed 403(b) plans is a welcome development. However, for long-standing 403(b) plans, there may be some amount of upfront work to review and update plan documents in preparation for submitting a plan for a determination letter. As such, plan sponsors should see where they fit into the EIN-driven filing schedule described above and plan ahead for the upcoming filing deadlines.
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[1] TEFRA church defined benefit plans (see §1.403(b)-10(f)(2)) and 403(b) plans grandfathered under Revenue Ruling 82-102 are not eligible for the determination letter program.
[2] The end of the remedial amendment period for a governmental 403(b) plan is the later of (a) the last day of the second calendar year following the calendar year in which (i) the plan is first put into effect (for a new plan), or (ii) an amendment to the plan is adopted or effective, whichever is later (for an existing plan); or (b) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after (i) the end of the plan’s initial plan year (for a new plan) or (ii) the calendar year in which the amendment is adopted or effective, whichever is later (for an existing plan). In the case of a change in the 403(b) plan requirements, the later of (A) the last day of the second calendar year that begins after the issuance of the Required Amendments List in which the change occurs; or (B) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date of issuance of the Required Amendments List in which the change occurs.
[3] The amendment deadline for a discretionary amendment to a governmental 403(b) plan is the later of (1) the end of the plan year in which the plan amendment is operationally put into effect; or (2) 90 days after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the plan amendment is operationally put into effect.