IRS Providing Interim 403(b) Plan Document Relief

February 16, 2012 – 3:54 pm | By Gwen Cofield | Post a Comment

The IRS is promising that changes to the Employee Plans Compliance Resolution System program are coming soon, and those changes will provide a way to correct plan document errors. The IRS has also proposed a “remedial amendment period” for 403(b) plans, as part of its proposed 403(b) prototype program, which will allow employers to retroactively correct certain plan errors for employers that adopt a prototype plan in a timely manner.

IRS regulations issued in 2007 imposed a written plan document requirement on 403(b) plans, making it for the first a condition of a plan obtaining and maintaining 403(b) status. This rule became effective, with some exceptions, Jan. 1, 2009.

However, the 403(b) plan document rule was made effective after the IRS published its latest version of its corrections program, EPCRS. This program provides a systematic way for employers to cost-effectively fix many 401(a) plan document problems that may otherwise cause a plan to become disqualified. But the current version of the EPCRS program does not provide any process to fix 403(b) plan document problems. So there is no systemic way to currently correct 403(b) plan document errors.

Monika Templeman, IRS’ director of employee plans examinations, has announced an interim program to address this problem until the EPCRS and prototype programs are in place.  Though not provided in formal, published guidance, Templeman has announced that under the interim program, IRS examination staff will approach plan problems in an accommodating manner:

  1. If an examining agent has discovered on audit that an employer has not adopted a formal plan document, the employer may (under non-abusive circumstances), enter into a type of closing agreement where the lesser “Voluntary Corrections Program” (VCP) sanctions will apply, rather than the more expensive “Closing Agreement Program” (CAP) sanctions (which will normally apply to errors found during an audit).
  2. If a plan has been found to have a plan document error, the employer will be given the option of: (a) amending the plan prospectively while fixing the past error as an operational error (either as a self-correction, where applicable, or under the favorable VCP sanctions); or (b) committing instead to adopting a prototype program (when issued) and following the rules for the remedial amendment period under that program.

If the employer chooses the second option, the IRS will put the employer on a “follow-up” list, where the agency will seek to verify that the prototype has been adopted, and the remedial amendment rules changed.

An employer should avoid attempting to retroactively amend the plan on audit, according to retirement plan expert Robert Toth, Jr.  Because of several procedural issues, retroactive amendment of the plan on audit will trigger the higher CAP sanctions, he noted.

“This does point out the serious nature of plan documents, which is something of a cultural change for 403(b) plans, and the importance of paying close attention to them,” said Toth.

Toth will explain more details on the remedial program in The 403(b)/457 Plan Requirements Handbook, published by Thompson Publishing Group.

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