With the March 31 deadline to correct form defects in plan documents under the Initial Remedial Amendment Period fast approaching, employers now have less than two months to ensure that their 403(b) plans are in compliance with Internal Revenue Code Section 403(b), including amendments to reflect the “once-in, always-in” rule and the new hardship distribution rules.
Last October, the US Internal Revenue Service (IRS) released Revenue Procedure (Rev. Proc.) 2019-39, 2019-42 IRB 945, which established a system of recurring "Remedial Amendment Periods" to correct defects in the form of individually designed and preapproved 403(b) plan documents that occur after March 31, 2020. This system of recurring Remedial Amendment Periods is a replacement for the 10-year "Initial Remedial Amendment Period" currently in effect and closing March 31, 2020. In addition, employers should be aware of the corresponding March 31 deadline to adopt corrective amendments or a preapproved plan to ensure the compliance of 403(b) plan documents retroactive to January 1, 2010.
In 2013, the IRS issued Rev. Proc. 2013-22, establishing the Initial Remedial Amendment Period to enable employers to correct form defects in individually designed or preapproved plan documents retroactive to the first day of the plan’s Initial Remedial Amendment Period: the later of Jan. 1, 2010, or the effective date of the plan. In 2017, the IRS issued Rev. Proc. 2017-18, which established the last day of the Initial Remedial Amendment Period as March 31, 2020.
As a result, a plan that does not satisfy the requirements of Section 403(b) in form on any day during the Initial Remedial Amendment Period will be able to remedy the error and be considered to have satisfied those requirements if, on or before March 31, 2020, all provisions of the plan that are necessary to satisfy Section 403(b) have been adopted and made effective from the beginning of the Initial Remedial Amendment Period. One such requirement is the adoption of an amendment to address the “once-in, always-in” (OIAI) rule under which, once an excluded part-time employee commences participation in the plan after working at least 1,000 hours in the prior plan year, the part-time employee must remain a participant thereafter regardless of whether he or she works less than 1,000 hours in any subsequent year.
An employer that sponsors an individually designed 403(b) plan that has excluded such part-time employees in form or in practice must amend its plan to correct the error, including by amending the plan to reflect how it was actually administered while it was out of compliance. Preapproved vendor-provided documents should already contain the OIAI rule and should not need to be amended even in instances where the employer may have not followed the rule when administering its plan.
Another requirement under Section 403(b) is the adoption of amendments to reflect the new hardship distribution rules, though there is speculation that the IRS may extend the Remedial Amendment Period with respect to hardship distributions because the final regulations were only issued this past September.
Immediate Action Required
Employers now have less than two months to ensure that their 403(b) plans are in compliance. Thus, it is important for employers that have not already done so to have their 403(b) plan documents reviewed by counsel. If a plan is provided by the plan’s service provider, counsel should confirm that the plan document in use is the provider’s most current version. If the plan was drafted specifically for the employer, i.e., individually designed, it should be reviewed to confirm that it meets the IRS’s plan document requirements.
Limited Extension of Initial Remedial Amendment Period to Correct Form Defects Occurring Near End of This Period
Rev. Proc. 2019-39 allows employers extra time to correct form defects occurring near the end of the Initial Remedial Amendment Period. The extended deadline is the later of (1) March 31, 2020, or (2) the end of the Remedial Amendment Period under Rev. Proc. 2019-39, which is generally the last day of the second calendar year following the calendar year in which the defect arose. Employers should contact counsel if they believe their plans qualify for this extension.
Rev. Proc. 2019-39 establishes a regime of recurring Remedial Amendment Periods to address the correction of form defects affecting individually designed and preapproved plans that first occur after March 31, 2020. It defines a form defect as any of the following:
Individually Designed Plans
Beginning and End Dates for Remedial Amendment Periods and Effect of Plan Termination
For individually designed Section 403(b) plans, Rev. Proc. 2019-39 establishes a system of recurring Remedial Amendment Periods to allow an employer to retroactively correct form defects in its written Section 403(b) plan first occurring after March 31, 2020. Under this system, an individually designed 403(b) plan that does not satisfy the Section 403(b) requirements on any day solely as a result of a form defect will be considered to have satisfied the requirements if, on or before the last day of the Remedial Amendment Period, the defect has been corrected.
The following chart identifies the beginning and end dates for the Remedial Amendment Period (RAP for purposes of this chart) with respect to particular types of form defects.
|
Form Defect |
RAP Beginning Date |
RAP Ending Date |
|
1. With respect to a provision of, or absence of a provision from, a new plan |
The date the plan is put into effect |
The last day of the second calendar year following the calendar year in which the plan is put into effect |
|
2. With respect to an amendment to an existing plan |
The date the plan amendment is adopted or put into effect, whichever is earlier |
The last day of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later |
|
3. With respect to a provision that fails to satisfy the Section 403(b) requirements by reason of a change in those requirements |
The date on which the change affected by an amendment to the Code or a change in the requirements provided in regulations or other guidance published in the Internal Revenue Bulletin became effective with respect to the plan |
The last day of the second calendar year that begins after the issuance of the Required Amendments List in which the change in Section 403(b) requirements appears |
|
4. With respect to a provision that is integral to a Section 403(b) requirement that has been changed |
The first day on which the plan was operated in accordance with such provision, as amended |
The last day of the second calendar year that begins after the issuance of the Required Amendments List in which the change in Section 403(b) requirements appears |
Governmental plans are given additional time if the amendment is required to be adopted by a legislative body.
If an employer terminates an individually designed Section 403(b) plan, the Remedial Amendment Period for each form defect will end. Thus, any retroactive remedial plan amendments or other amendments required to be adopted to reflect Section 403(b) requirements that apply as of the date of termination must be adopted in connection with the plan termination, regardless of whether such requirements are included on a Required Amendments List.
Errors Arising from Discretionary Amendments
For an error arising from a discretionary amendment not involving a form defect, the plan amendment deadline is the end of the plan year in which the plan amendment is operationally put into effect, i.e., the end of the plan year in which the plan is administered in a manner consistent with the intended plan amendment.
For governmental plans, the discretionary plan amendment deadline is the later of the deadline just described, or 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 is administered in a manner consistent with the intended plan amendment.
Required Amendments List
Beginning in 2019, changes in Section 403(b) requirements will be included in the Required Amendments List that the IRS publishes annually. Per Rev. Proc. 2019-39, the list will be used to determine the date that the Remedial Amendment Period ends for changes in Section 403(b) requirements.
Preapproved Plans
Like for individually designed Section 403(b) plans, Rev. Proc. 2019-39 establishes a system of recurring Remedial Amendment Periods for retroactive corrections of form defects first occurring after March 31, 2020, in preapproved Section 403(b) plans.
The beginning of the Remedial Amendment Period for preapproved Section 403(b) plan form defects is the same as for individually designed Section 403(b) plans. The end of the period generally will be no earlier than the end of the next Section 403(b) preapproved plan cycle during which a sponsor of a preapproved plan will be able to apply to the IRS for a Section 403(b) preapproved plan letter, as is required every six years. To the extent there is a change in 403(b) requirements that necessitates a change in a preapproved Section 403(b) plan, the employer must adopt an interim amendment by the end of the calendar year after the calendar year in which the change in Section 403(b) requirements is effective with respect to the plan. As a practical matter, the preapproved plan sponsor will generally furnish the interim amendment to employers that have adopted its plan.
As with individually designed plans, termination of a preapproved Section 403(b) plan will end and generally shorten the Remedial Amendment Period for each form defect of the plan, and requires the adoption of plan amendments as described for individually designed Section 403(b) plans above.
If an employer corrects a form defect after the expiration of the applicable Remedial Amendment Period, the plan will not be considered to satisfy the requirements of Section 403(b). The employer may be able to correct the form defect under the IRS Employee Plans Compliance Resolution System (EPCRS). See Rev. Proc. 2019-19, 2019-19 IRB 1086.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Lisa Barton
Chicago
Dan Salemi
New York
Craig Bitman
Anna Pomykala
Philadelphia
Bob Abramowitz
Amy Kelly
Pittsburgh
John Ferreira
Matt Hawes
R. Randall Tracht
Washington, DC
Rosina Barker
Althea Day
Greg Needles
Jonathan Zimmerman