Compliance Update and 403(B) Plan Document

403(B) Plan Document

For many years, the IRS offered little guidance to governmental or tax-exempt employers as to the specific plan document requirements applicable to 403(b) retirement plans. Recently, however, the IRS has approved model and prototype plan documents that sponsors of 403(b) plans can adapt to ensure document compliance.

As a result, your plan document vendor or service provider may be contacting you in the next few months to offer to restate your plan. This process may appear to be routine but can result in significant exposure to liability if not evaluated carefully. In addition, the IRS has indicated that it is stepping up its audit activity with respect to such plans.

403(b) Plans

403(b) plans are really limited to select employers, and that includes public schools, including universities and colleges, and private charities that are qualified under section 501(c3) And, as I mentioned, they’re specialized plans and they have a special sort of history. They didn’t arise in the manner that other retirement-type vehicles did, they were more related to insurance products beginning prior to the 1950’s and, in 1958 was the first legislation related to 403(b) plans, which really just included a limitation and so, 403(b), the section of the internal revenue code where the plans get their names, started out as simply a limitation on the amount that individuals could defer from compensation, under what were referred to as tax-sheltered annuity contracts.

Comprehensive Plan Documents

So, these plans arose from these individual insurance-type products, and therefore, for many years they were not treated in the same manner as other retirement plans in that there were no specific or comprehensive plan documents related to these arrangements and often were just covered by individual contracts with individual employees. So, from the 1950’s until probably the late 1990’s, 403(b) plans were virtually ignored by the Internal Revenue Service, at least as far as providing guidance as to what is required of 403(b) plans. There were no regulations and there were few pronouncements related to 403(b) plans.

In the late 90’s, early 2000’s, the IRS determined that that probably wasn’t the best approach and proposed regulations, a fairly comprehensive set of regulations of 403(b) plans. The regulations became final in 2007, and they included a requirement that an employer has adopted a formal plan document for their 403(b) arrangements.

Now, although they imposed this requirement that there be a plan and that we had regulations then that indicated what the plan should include, there was no approval process similar to what we have with other qualified plans where you could submit your plan document for a determination letter, nor was there any pre-approved documents like we have for 401(k) and other retirement plans. So the Internal Revenue Service, also recognizing that that’s a problem for employers, has now adopted, at least, a pre-approved plan process.


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