Generally, a 403(b) plan is a retirement planning program whereby a public school or tax-exempt 501(c)(3) organization (including churches) makes contributions for their employees (and certain ministers) to specific types of funding arrangements (i.e., annuity contracts, custodial accounts, or retirement income accounts [which are limited to church employees and ministers]). Historically, 403(b) plans utilized annuities as their funding vehicles. Thus, 403(b) plans are often referred to as tax sheltered annuities or TSA plans.
In 2007, the Internal Revenue Service ("IRS") published final regulations applicable to 403(b) programs. These regulations required that a 403(b) program be operated "pursuant to a written plan which, in both form and operation, satisfies the requirements of [Code] Section 403(b) and these regulations." In addition, the regulations contained rules governing the limits on contributions, the timing of distributions, nondiscrimination and universal availability requirements, and rules regarding the funding and termination of 403(b) programs.
Prior to the final regulations, many 403(b) plan sponsors had not adopted a separate "written plan" document for their 403(b) plans. The IRS responded to this situation by establishing a program whereby certain providers could offer standardized prototype or volume submitter 403(b) plan documents to plan sponsors (hereinafter referred to as a "Pre-Approved Plan") and establishing a period during which a plan sponsor could "retroactively correct defects in the form of its written 403(b) plan document by timely adopting a [Pre-Approved Plan] or otherwise timely amending its [non-Pre-Approved Plan or individually designed] 403(b) plan". This was commonly referred to as the "Initial Remedial Amendment Period".
Prior IRS guidance established that the Initial Remedial Amendment Period begins on January 1, 2010 (or, if later, the effective date of the plan) and ends on March 31, 2020. Thus, under the prior guidance, 403(b) plan sponsors had until March 31, 2020, to review (and, if necessary, amend) their written plan documents to comply with Code Section 403(b) and the final regulations.
On September 30, 2019, the IRS released Revenue Procedure 2019-39 (the "Revenue Procedure") which provides a limited extension to the Initial Remedial Amendment Period (hereinafter, as modified by the Revenue Procedure, the "IRA Period"), establishes recurring remedial amendment periods for periods after the end of the IRA Period, and provides guidance on the future distribution of information on changes in 403(b) plan form and operational requirements (i.e., the Required Amendments List and the Operational Compliance List). While future remedial amendment periods and future amendment and operational requirements are of major interest, this article will address the end of the IRA Period (as extended by the Revenue Procedure).
Under the Revenue Procedure, the end of the IRA Period depends upon whether the plan sponsor utilizes an individually designed plan document or a Pre-Approved Plan document. In addition, there are special rules that apply to governmental plans (within the meaning of Code Section 414(d)), plans that are initially adopted or terminated during the IRA Period and plans that adopt discretionary amendments during the IRA Period.
In order to determine the end of their IRA Period, a plan sponsor (or their advisor) should review their written 403(b) plan document to determine whether: (1) the plan utilizes a Pre-Approved Plan or individually designed plan document; (2) the plan is a governmental plan; and (3) the plan has been initially adopted, amended or terminated during the IRA Period.
With respect to a plan utilizing an individually designed plan document, the Revenue Procedure provides that the IRA Period ends on the later of:
(a) March 31, 2020:
(b) for recently adopted plans, the last day of the second calendar year following the calendar year in which the plan was put into effect;
(c) for an amendment to an existing plan, the last day of the second calendar year following the year in which in amendment was adopted or effective; and
(d) for a change in 403(b) requirements listed in the 2019 Required Amendments List (to be released later this year), the end of the second calendar year following the release of the 2019 Required Amendments List (i.e., December 31, 2021). However, there is a special rule for defects related to a change in 403(b) requirements that were effective prior to January 1, 2019, which retains March 31, 2020, as the end of the IRA Period.
In the case of governmental individually designed plans, the "second calendar year" rules (in items (b), (c) and (d) above) are replaced with a rule keying off the "close of the third regular legislative session of the legislative body with the authority to amend the plan".
With respect to Pre-Approved Plans, the Revenue Procedure provides that the IRA Period will end no later than the end of the second pre-approved plan cycle (expected to begin immediately after March 31, 2020, and running for approximately six years) which is expected to be sometime in 2026. Prior to the end of Cycle 2, the IRS will issue guidance providing rules for determining when the IRA period ends for 403(b) plans with form defects that occurred during the first cycle.
However, the extension of the IRA Period for Pre-Approved Plans does not apply to discretionary pre-January 1, 2018 amendments. With respect to these pre-January 1, 2018 amendments, the end of the IRA period remains March 31, 2020. In addition, the extension of the end of the IRA period for amendments required by a change in the 403(b) requirements is conditioned on the plan sponsor adopting an interim amendment by the later of: March 31, 2020, or the end of the calendar year after the calendar year in which the change in the 403(b) requirement was effective.
With respect to terminating retirement plans (both individually designed plans and Pre-Approved Plans), the IRA Period is coterminous with the plan termination (i.e., the amendments must be adopted in connection with the plan termination). Finally, the Revenue Procedure notes that some plan defects cannot be corrected by retroactive amendment and the proper procedure for correcting these types of defects is the Employee Plans Compliance Resolution System.
In summary, the Revenue Procedure provides a limited extension to the IRA Period, establishes recurring remedial amendment periods after the expiration of the IRA Period, and provides guidance on other issues relating to the maintenance and administration of 403(b) plans. Given the more favorable treatment of Pre-Approved Plans, plan sponsors utilizing an individually designed plan document may want to consider restarting their plans into a Pre-Approved Plan document. While the Revenue Procedure's limited extension of the IRA Period for 403(b) plans is helpful, questions may arise as to whether a particular extension is available or which extension applies to some plans. As such, the Revenue Procedure should be viewed as a call to action for plan sponsors to take steps in the near future to ensure that their written plan documents are timely amended to comply with the requirements of Code Section 403(b) and the final regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.