Compliance November 8, 2022

IRS to Permit Determination and Termination Letters for 403(b) Plans

Beginning in June 2023, the IRS will allow 403(b) plans to apply for determination and termination letters, similar to 401(a) plans.

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Starting in June 2023, the IRS will permit sponsors of individually designed 403(b) plans to request a determination letter for a new plan or for terminating a plan using the same program currently used by 401(k) plans and other plans qualified under Section 401(a).

The announcement of Revenue Procedure 2022-40 expands one of the IRS and Treasury programs for approving retirement plans, allowing 403(b) plans—which are used by certain public schools, churches, and charities—to apply for the same tax-favored treatment as qualified retirement plans.

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The implementation of the new rule will be staggered by Employer Identification Number. Sponsors with an EIN ending in 1, 2, or 3 may begin requesting determination letters starting June 1, 2023. Those ending in 4, 5, 6, or 7 must wait until June 1, 2024; and those ending in 8, 9, or 0 must wait until June 1, 2025. Terminating 403(b) plans may request a plan termination letter without regard for EIN beginning June 1, 2023.

Determination letters are often used by qualified retirement plans to seek official approval from the IRS, according to Robert Abramowitz, an employee benefits attorney and partner at Morgan Lewis. Though these letters are not required by law, it is standard practice for larger plan sponsors of 401(a) qualified retirement plans.

These letters are essentially an insurance policy against IRS audits or legal flaws in the plan design because the sponsor can rely on previous IRS approval. It also permits a sponsor to catch an issue quickly by referring it to the IRS before they invest heavily in a flawed plan. Also, sometimes a third party, such as creditor, will ask a sponsor to obtain or share their determination letter as a condition of service, explains Abramowitz.

Under Revenue Procedure 2022-40, the determination letter process will now become available to 403(b) plans. Abramowitz describes it as “a big change” for 403(b) plans, and a change to their benefit. It will streamline the process of plan adoption and make it more similar to the process for qualified retirement plans, like 401(k) plans.

David Ashner, an employee benefits attorney at Groom Law Group, says that individually designed 403(b) plans could not get formal approval from the IRS prior to this change.

Abramowitz cautions however, that though this is “good news for many,” those sponsors of long-standing 403(b) plans that seek determination letters may have long-standing flaws revealed as part of the process. He explains that sponsors of older plans should “be careful what you ask for. The IRS looks at things carefully.”

He notes that sponsors normally seek determination as part of initial plan adoption to avoid having to correct issues down the road.

Ashner adds that many 403(b) sponsors are institutions such as universities which often have highly unique plans that go back decades. This change is something that 403(b) sponsors have wanted for a long time, and there should “be a lot of interest” in acquiring determination letters.

Ashner explains that the change also allows 403(b) sponsors to apply for determination letters when terminating a 403(b) plan. This allows them to get approval from the IRS to close out a plan properly. Though rare, Ashner says that if a plan is terminated and the IRS later determines that the plan was not qualified, then the sponsor as well as the participants could face onerous tax consequences because the plan would no longer be considered tax advantaged.

The full text of Revenue Procedure 2022-40 can be found here.

Compliance November 8, 2022

Midterm Election Results Could Delay SECURE 2.0

A shift in Congressional power in Washington to Republicans could delay passage of SECURE 2.0 and push Democrat's ESG and cryptocurrency efforts to administrative tactics, experts say.

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SECURE 2.0, a substantial package of bipartisan retirement legislation, is widely expected to pass at the end of this year, but the results of Tuesday’s midterm elections may shift the timeline, according to one legal expert. 

“Republicans are going to have to decide if they’re going to do a year-end spending bill and if they want to include retirement as part of that,” says Michael Kreps, an attorney and co-chair at Groom Law’s Retirement Services & Fiduciary Group. “It’s just not possible to predict, but it could happen that it goes next year or even the end of next year.” 

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Kreps says that it’s “really difficult to say whether any [election] scenario [on SECURE 2.0 passing] results in more or less likelihood.” But if Democrats hold Congress, SECURE 2.0 would probably keep on the path it’s on right now with potential passage at the end of this year. Whereas Republicans may move the yardstick at least slightly.

The industry has been watching closely a package of three retirement reform bills, known collectively as “SECURE 2.0,” which are expected to be consolidated and passed sometime this December, expanding 2019 legislation aimed at increasing retirement plan access and savings in the U.S.

Two of the three bills, the Enhancing American Retirement Now (EARN) Act, and the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (Rise and Shine) Act were advanced out of the Senate Finance and Health, Education, Labor and Pensions committees respectively, in June, by unanimous votes, though they have not yet had a full vote in the Senate. The third, the Securing a Strong Retirement Act was passed by the House in May, on a vote of 414 to 5. 

Andrew Oringer, a partner of law firm Dechert LLP who leads the firm’s national fiduciary practice, says the likelihood of SECURE 2.0 passage is still strong even if Republicans take control of Congress.

“This is a relatively uncontroversial bill, and it’s the kind of thing where both parties can say that they are trying to do something good,” Oringer says.  

He notes that, if Republicans do win the House and Senate, there will probably “be a shift for administrative action, which, at least in the first instance, wouldn’t require Congress to act.” 

Oringer noted that the U.S. Department of Labor and Biden Administration would likely advance whatever they could in areas of focus. These include pushes for environmental, social, and governance standards to be part of retirement investment planning, as well as caution around the inclusion of cryptocurrencies in 401(k) plans.  

“It would not surprise me if the focus shifted to administrative areas where things could still get accomplished,” he says.  

The original SECURE Act was the Setting Every Community Up for Retirement Enhancement Act.

Kreps of Groom Law Group notes that the original SECURE Act was “largely finished” in 2015 but did not pass until the end of 2019.  

“There is nothing in the House or Senate package that is an absolute deal-stopper,” he says. “A deal is possible and there is a will—the question is whether there is a will for this year.”

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