ABA Health eSource
May 2009 Volume 5 Number 9

New 403(b) Prototype Program Offers Planning Opportunity for Employers

By Philip J. Castrogiovanni, McDermott Will & Emery, Chicago, IL

AuthorOn April 14, 2009, the Internal Revenue Service (IRS) published Announcement 2009-34 (Announcement) describing its intent to establish a program to allow pre-approval of prototype plans under Internal Revenue Code (Code) Section 403(b). The program will be offered along side existing individually approved 403(b) plans. The Announcement requests comments by June 1, 2009, on a proposed revenue procedure to implement the 403(b) prototype plan regime and it also requests that each vendor which expects to establish a prototype plan notify the IRS of its intent to do so by June 1, 2009.  Once the process for establishing a 403(b) prototype plan is finalized, vendors can establish such arrangements and offer them to adopting employers.  A prototype plan is an attractive option for employers maintaining a simple 403(b) plan design that want to ease their administrative burden while assuring that their plan continues to meet IRS plan qualification requirements.

 A 403(b) plan is a defined contribution retirement plan similar to a 401(k) plan that can be maintained by tax-exempt organizations. The contribution limits and many of the same rules applicable to a 401(k) plan also apply to a 403(b) plan.

Proposed Program

While only in proposed form at this point, the revenue procedure accompanying the Announcement provides insights into the likely approach to the prototype program that will eventually be adopted by the IRS.  The revenue procedure describes the opinion letter program for 403(b) prototype plans and states that the program will be governed by rules similar to those already applicable to 401(k) prototype plans, adjusted for differences unique to 403(b) plans.

The Announcement states that prototype plans may be established as standardized plans or nonstandardized plans.  Standardized plans allow for employee elective deferrals alone or elective deferrals and employer contributions that satisfy uniform coverage and contribution requirements.  Nonstandardized plans are plans that fail to meet these requirements.  If an employer adopts a nonstandardized plan, it may generally rely on the prototype plan’s opinion letter with respect to the plan documents, but must separately satisfy nondiscrimination and coverage testing under Internal Revenue Code Section 401(a)(4) and 410(b).  The sponsoring employer can, but is not required to, request an individual determination letter as to the nondiscrimination and coverage testing.  The IRS intends to publish guidance on this determination letter process in the future.

The proposed revenue procedure establishes the mandatory provisions to be included in every 403(b) prototype plan.  These requirements reflect both legally required elements of a 403(b) plan as well as certain elements that are unique to the operation of a prototype plan, such as the requirement that the prototype provider be allowed to amend the 403(b) prototype plan on behalf of each participating employer.  Some of the most important mandatory requirements are as follows: the plan must satisfy the universal availability requirement regarding employee deferrals; all contributions under the plan (employee and employer) must be 100 percent vested at all times; and the plan must set forth the terms governing hardship distributions, loans, plan-to-plan transfers, contract-to-contract exchanges and rollovers, if applicable. While the universal availability requirement and provisions governing distributions, loans, transfers and exchanges apply to individually designed plans, the 100 percent vesting requirement is new and applies only under the prototype regime.

What Employers Should Do Now

In Notice 2009-3, the IRS delayed the implementation of certain requirements of the final 403(b) regulations that were otherwise effective as of January 1, 2009, and most notably allowed sponsors of such arrangements to delay the adoption of a written plan document until as late as December 31, 2009.  However, sponsors of 403(b) plans must ensure that their plans are operationally compliant with the final regulations as of January 1, 2009, and the establishment of the 403(b) prototype program in no way alters this compliance requirement, even if the sponsor of an existing plan adopts a 403(b) prototype plan during 2009 (assuming the program is implemented by December 31, 2009).  Therefore, all sponsors of individually designed 403(b) plans should continue to ensure that their plans comply in operation with the final 403(b) regulations.

During the review period for the proposed revenue procedure, sponsors of 403(b) plans should evaluate their plan's design to determine whether their plan is suited to establishment as, or conversion to, a prototype plan.  Plans that provide for only employee deferrals or employee deferrals with a 100% vested employer contribution may be well suited to the prototype regime.  Conversely, plans with complicated designs or employer contributions subject to vesting requirements are not suited to the proposed program (as presently drafted).  If a plan sponsor determines that its 403(b) plan is suited to the regime and wants to implement a prototype plan, it should determine whether its current vendor will provide a 403(b) prototype plan and determine whether the current vendor is the appropriate provider of such an arrangement.  Thereafter, the sponsor can work with a selected vendor to implement its 403(b) prototype plan.

Those sponsors not electing to adopt a 403(b) prototype plan or that are otherwise unable to do so because of a complex plan design or for other reasons should continue to ensure compliance with the final 403(b) regulations, and should continue to monitor guidance from the IRS to determine whether the IRS intends to approve 403(b) plans via a program similar to the determination letter program in place for 401(k) plans.  Announcement 2009-34 reiterates the IRS’s intent to establish a determination letter program for individually designed 403(b) plans, but, as with prior guidance, the Announcement does not specify a date as of which such program will be established.

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