403(b) Pre-Approved Plan Program: What to Know

A significant part of the 403(b) regulations passed in 2007 was the requirement that plans be maintained pursuant to a written plan document.

The Internal Revenue Service (IRS) indicated its intent to establish a 403(b) pre-approved plan program similar to the pre-approved plan program for 401(k)s, and plan sponsors waited. Now the wait is over. In April the agency issued Revenue Procedure 2013-22 establishing the program, effective April 29, and providing an instruction manual for how the program works. (See “IRS Establishes Program for Pre-Approved 403(b) Plans.”)  

During a webcast sponsored by VALIC, Bob Architect, vice president of Compliance & Market Strategy at VALIC, explained that the IRS is opening the submission period for plans June 28. Organizations such as service providers will submit to the Service what they consider to be plans that meet the IRS form requirements. If the agency approves the plan, it will send a letter to the submitter stating so. At that point, plan sponsors that adopt these plans will have reliance that their plan document complies with the regulations as to form.  

According to Architect, the IRS has indicated it will issue letters of approval at the same time so no organization will have a competitive advantage over others. He explained that the submission period ends April 30, 2014, and it is expected that it may take up to two years to go through all applications. The total process could go into 2017.  

While adopting a pre-approved plan is voluntary, it offers significant advantages for plan sponsors, Architect said. The most obvious advantage is that the plan sponsor will have reliance that the plan complies with regulations as to form. In addition, sponsors that adopt a pre-approved plan will have the ability to remedially amend their plans retroactive to January 1, 2010. “This is huge because it gives [sponsors] an extra advantage for current examinations,” Architect said.

He explained that if a 403(b) plan sponsor is under examination and it is found the plan document is not compliant as to form, the plan sponsor can express its intent to adopt a pre-approved plan and the IRS will suspend that part of the examination. However, Architect warned, the agency will come back to make sure the plan sponsor actually adopted a pre-approved plan.  

Another advantage to adopting a pre-approved plan is the organization that offers the plan is responsible for keeping the plan compliant and updated for any new regulations. “This is a huge burden lifted off the shoulders of plan sponsors,” Architect said.  

Richard Turner, vice president and deputy general counsel at VALIC, noted that the pre-approved program introduces a new vocabulary to 403(b) plan sponsors. There will be three types of pre-approved plans sponsors may adopt.   

Turner explained that “prototype” means the plan has been submitted to the IRS and has been approved as to form. There are two types of prototype documents, “standardized” and “non-standardized.” Standardized is a prototype that consists of a base plan document and an adoption agreement. The plan sponsor can select certain plan features from options provided in the adoption agreement. The options in the adoption agreement are designed not only to comply with regulations generally, but also to comply with nondiscrimination rules. A non-standardized prototype also has a base document and an adoption agreement, but the adoption agreement offers more plan options and some are not necessarily designed to comply with nondiscrimination rules.

“Many plan sponsors, such as public schools and steeple churches, are not subject to nondiscrimination requirements, so the difference between standardized and non- won’t matter, but plan sponsors that are subject to testing will want to consider the difference,” Turner said.  

The third type of pre-approved plan is a volume submitter plan. According to Turner, they will probably look a lot like prototypes with a basic document and an adoption agreement, but plan sponsors will have the ability to make minor modifications to the document and still have reliance that it complies with regulations as to form. For prototype documents, any changes at all will need new approval.  

Turner noted that the IRS has made it clear that, at least in the near term, it will not establish a determination letter program for individually designed plans, so there is no reliance as to compliance with form without a pre-approved plan or a private letter ruling previously received by a plan sponsor. He also stressed that plan sponsors that do not adopt a pre-approved plan cannot take advantage of the remedial amendment period.  He noted that the model language the IRS issued previously for use by public schools still remains available for reliance.  

The 2007 regulations allowed plan sponsors to use a “paper-clip” approach to establish their written plan document, which includes a base plan and attached or referenced annuity contracts or custodial agreements. Turner told webcast attendees that if their plan incorporates annuity contracts and custodial accounts, and the plan sponsor adopts a pre-approved plan, in order to have reliance as to form, the plan must override contract provisions. For example, he said, if a contract allows loans for any reason and the plan allows loans only in the event of a hardship, the plan dictates practice.

Turner warned that if the operation of a plan has not matched provisions of a newly adopted pre-approved plan, the plan sponsor must correct the operational errors. He noted there is an opportunity to correct operational procedures now to prepare for adopting a pre-approved plan (see “A New Compliance Environment for 403(b)s”).  

Plan sponsors will want to make sure the only things changing about their plan documents are things they need to fix, Turner said. For example, if the plan sponsor forgot to amend its plan for a new provision or rule, then it will be good to adopt a pre-approved plan that is updated for that amendment.  

Turner noted that the listing of required modifications (LRMs)—provisions the document must contain—included with the pre-approved plan program do not include all Employee Retirement Income Security Act (ERISA)-specific requirements, such as joint and survivor distribution and spousal consent rules and break in service rules. The IRS steers ERISA plans to other guidance. Turner thinks the agency did this because many plans are not subject to ERISA.  

One unanswered question is how the accountant community will react. Turner said it is unknown whether auditors will require pre-approved plan adoption in order not to issue a negative disclaimer with audit results.