Focusing 403(b) Plan Clients on Document Remedial Amendment Period

Both Employee Retirement Income Security Act (ERISA)-governed and non-ERISA 403(b) plan sponsors need to start working on any plan restatements now.

The last day of the 403(b) plan remedial amendment period may seem far off, but it’s not, and both Employee Retirement Income Security Act (ERISA)-governed and non-ERISA 403(b) plan sponsors need to start working on any plan restatements now.

Grant Halvorsen, VP Retirement Plan Consulting at MRP, formerly Moreton Retirement Partners, in Salt Lake City, Utah, explains that when the final regulations were put into place in 2007, they stated that all 403(b) plan sponsors (other than certain church plan sponsors) had to adopt a written plan document no later than December 31, 2009—a new requirement for non-ERISA plans. However, he says, the Internal Revenue Service (IRS) did no offer a lot more guidance about what the document needed to say or include. “Plan sponsors made a good faith effort, with the comment of really being not sure if their documents comply with what the IRS wants,” Halvorsen says.

In fact, the IRS indicated that the plan document requirement can be satisfied with a collection of documents, sometimes referred to as the “paper-clip” approach, with one centralized document and additional provisions found in a variety of documents, including underlying investment products, administrative and service agreements, procedures, and if applicable, state statutes and regulations.

In April 2013, the agency issued Revenue Procedure 2013-22 establishing a pre-approved plan program for 403(b)s and offered a remedial amendment period for 403(b) plan documents. The last day of the remedial amendment period for 403(b) plans is March 31, 2020.

What the remedial amendment period offers

Halvorsen explains that the remedial amendment period allows 403(b) plan sponsors to restate their plans to adopt one of the prototype or volume submitter plan documents pre-approved by the IRS, retroactively effective January 1, 2010. Plan sponsors may adopt these plans as restatements to correct any form defects in their written plans from January 1, 2010, to the end of the remedial amendment period.

In other words, says Deborah Grace, attorney at Dickinson Wright PLLC in Troy, Michigan, the remedial amendment cycle is a period of time in which the plan sponsor can go back and fix its plan document so it reflects how the plan has been operating.

Halvorsen notes that adopting a pre-approved document assures plan sponsors that their documents are correct in form. However, if they find they have operational errors—where the plan has not been administered according to terms of the document—those have to be corrected through the IRS’ Voluntary Correction Program (VCP) program, and plan sponsors still have to pay filing fees.

There are exceptions. Grace points out that the IRS is allowing for effective date addendums to 403(b) plan documents to allow plan sponsors to note any changes to plan administration that were made after the adoption of a written plan document. For example, Grace says, if a nonprofit adopted a 403(b) document effective January 1, 2009, and the document said the plan only accepts employee deferral contributions, but around 2015 the plan sponsor decided it would match employee deferrals and never amended its plan to reflect that, the IRS says if the plan sponsor had a good document in place at the end of 2009 and adopts a prototype as of March 31, 2020, it can add an amendment reflecting the effective date of the match with no penalty for not operating in accordance with the plan.

“That’s a key piece plan sponsors need to know—what they did with the plan between 2010 and the end of the remedial amendment period, and when any changes were effective,” she says.

To adopt or not to adopt

Neither Grace nor Halvorsen have come across a plan sponsor client that was previously using a paper-clip approach for their plan document and is having trouble fitting into a new IRS pre-approved plan document. However, Halvorsen suggests if that is the case, plan sponsors should amend their plan to fit into either a prototype or volume submitter pre-approved plan document. “A volume submitter plan document would be more flexible for paper-clipped plan documents and probably the best fit,” he says. “According to the IRS, as long as the document is ‘substantially similar’ to the volume submitter document, plan sponsors will have reliance that it complies in form to IRS regulations.”

From a practical standpoint, Grace says, plan sponsors rely on recordkeepers to partner with them to make sure the plan is operating correctly and assets are recordkept correctly, and recordkeepers prefer a pre-approved plan document—they’ve designed their systems to work with a pre-approved document. “If a plan sponsor has an individually designed plan document, it may be limited on which vendors it can use,” she says, “There’s no good reason not to adopt a pre-approved plan document.”

Grace adds that this plan restatement and remedial amendment period may provide a good incentive for non-ERISA plan sponsors, such as K-12 public schools, to consolidate vendors.

Both Grace and Halvorsen agree that if a 403(b) plan sponsor decides not to adopt a pre-approved plan document, it should turn to an attorney well-versed in the IRS regulations to review the plan document and provide a letter stating it complies. “Some may not be willing to do so, but it’s a good starting point,” Halvorsen says.