403(b) Prototype Likely to Allow for Vesting Schedules

The Internal Revenue Service (IRS) is reportedly working on a final revenue procedure for Section 403(b) prototype plans that takes into account comments received.

So said James Flannery, a tax law specialist at IRS, said at the annual conference of the American Society of Pension Professionals and Actuaries (ASPPA), according to a BNA report.

The IRS in April announced its intent to offer a prototype program for 403(b) plans (see “IRS Releases Proposed 403(b) Prototype Document Program“). A prototype program offers a master plan with adoption agreements containing various plan options that sponsors may elect or not. Adoption of a prototype comes with a determination letter from the IRS guaranteeing plan compliance with IRS rules.

Previously, to get this guarantee, 403(b) plan sponsors had to file for a private-letter ruling from the IRS that their plan complied. Douglas O. Kant, Senior Vice President and Deputy General Counsel at FMR LLC, pointed out that a prototype program would be cheaper for sponsors than filing for a private-letter ruling.

The biggest suggestion among all commenters to the IRS announcement of the program was to allow prototype plans to include vesting schedules (see “Trade Groups Comment on 403(b) Prototype Program“). According to BNA, Flannery said the IRS thought plans did not provide for this, and it “will amend the revenue procedure to allow for vesting of employer contributions.” The amendment will probably apply to government plans too, he said.

BNA said Flannery also addressed concerns about the draft revenue procedure requirement that the plan document terms override individual contract terms, and said the IRS is “taking a hard look” at that section of the revenue procedure to make it workable.

Among the comments was a suggestion for the IRS to consider a volume submitter program, in which an organization requests approval for a sample or specimen plan, which is then adopted by multiple employers. Employers may adopt versions of the specimen plan that have minor deviations in language, making these plans more flexible than prototype plans. In response, Flannery said that in creating the prototype program, the IRS is responding to recommendations made by the Advisory Committee on Tax Exempt and Government Entities, and going forward, it is “seriously considering” including a volume submitter program for Section 403(b) plans, according to the report.