An Overview of Pre-Approved 403(b) Retirement Plans

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Puneet:

Welcome to our overview of the IRS' 403(b) Pre-Approved Plan Program. I'm Puneet Arora, a tax law specialist with the Employee Plans Rulings and Agreements Group.

Jason:

And I'm Jason Levine. I'm a Senior Tax Law Specialist, also with the Employee Plans Rulings and Agreements Group.

In this video, Puneet and I will explain some of the major requirements for pre- approved 403(b) plans to receive favorable opinion or advisory letters after they are reviewed and approved by the IRS. Let's start with some background on 403(b) plans.

A 403(b) plan is a retirement plan for employees of public schools, certain tax- exempt organizations, and church ministers. It allows employees to use part of their salary to purchase annuities or invest in tax-deferred mutual funds. Congress added section 403(b) to the Internal Revenue Code in 1958 and the IRS issued 403(b) regulations in 1964. Between 1964 and 2004, the IRS issued several pieces of guidance applicable to 403(b) plans, but it did not comprehensively update the regulations. During this time, there was no Internal Revenue Code requirement for 403(b) plan sponsors to have a written plan document.

Puneet:

For years, many 403(b) plan sponsors, in particular public schools, did not actively administer their 403(b) plans. They viewed themselves merely as facilitators of the arrangements between their employees and the annuity or mutual fund providers.

Essentially, these 403(b) plan sponsors provided their employees with the names of vendors with whom they had agreements to receive 403(b) plan contributions. The employer deducted any elective deferrals the employee wanted to deposit and sent the funds to the vendor to contribute to the contract of the employee's choice. So, many employers weren't very involved with the establishment, administration or operation of their 403(b) plan. Big changes came in 2004, when the IRS released proposed 403(b) regulations consolidating all the guidance changes that had been made over the years and instituted some new requirements. These proposed regulations were finalized and were generally effective on January 1, 2009.

Jason:

The final regulations brought about major changes for 403(b) plan sponsors. One of the most important of these changes is that plan sponsors must now adopt a written plan document setting out the major provisions of the plan or the rules by which the plan operates. These required provisions include, eligibility and participation, benefits under the plan, available investments and the time and form of distributions.

This written plan document requirement brings us to why the IRS began the program for pre-approved 403(b) plan documents. Although sponsors have been able to use pre-approved qualified plans for years, prior to now there was no similar program for 403(b) plans. Why not? Before now, 403(b) plan sponsors didn't need a written plan under the Internal Revenue Code and weren't concerned with obtaining reliance on an IRS opinion or advisory letter. Now that written plans are required, sponsors are looking for the most efficient way to meet the requirement. The IRS recognizes that maintaining individually designed plans could be costly for employers. The types of organizations that can sponsor 403(b) plans typically have modest budgets, and the employer aims to accomplish a lot with very little. They are looking for the most economical option to best provide their employees with the opportunity to save for retirement. Because of economies of scale, adopting a pre-approved plan will give employers a less costly option to meet the written plan document requirement. As another benefit, since the sponsor of the pre-approved plan is usually responsible for maintaining the plan document, a pre-approved plan should make it simpler for employers to keep up to date with law changes.

Puneet:

So now that you know a little more about the pre-approved 403(b) plan program, is a pre-approved plan right for you? While many factors can impact whether a pre-approved plan is the best option for any particular employer's circumstances, generally, a 403(b) pre-approved plan will be the most cost-effective, simple method for employers to maintain a written plan. However, in exchange for the simplicity and affordability of a pre-approved plan, your organization may have to give up some flexibility. You might have to accept some of the standard plan provisions in the plan you choose. And speaking of choices, what kinds of pre- approved 403(b) plans are available? Let's start with the basics. A pre-approved plan is generally one of two types: a prototype or a volume submitter plan. A prototype plan consists of a basic plan document and an adoption agreement. The basic plan document contains all of the plan's nonelective provisions – in other words, the standard provisions that apply to all adopting employers. The adoption agreement contains information that's specific to the adopting employer and provisions that can be selected by an adopting employer. For example, the plan might let the adopting employer choose one of several possible formulas for matching contributions.

Each basic plan document and adoption agreement pair constitutes a separate 403(b) prototype plan. It doesn't matter if there are multiple investment arrangements or multiple vendors under the plan.

Now, let's talk about who's eligible to sponsor a 403(b) pre-approved plan and what kinds of employers can adopt them.

Jason:

Well, generally any entity can sponsor a 403(b) prototype plan if the entity has an established place of business in the United States where it can be reached every business day, and expects at least 30 eligible employers to adopt its basic plan document.

The most likely 403(b) prototype plan sponsors that come to mind are insurance companies, financial institutions, and retirement plan document providers. As for employers eligible to adopt a pre-approved 403(b) plan, generally any employer eligible to adopt a 403(b) plan can also choose a prototype plan. That means public schools, 501(c)(3) organizations, churches, and certain self- employed ministers. One goal of the program is to ensure that the pre-approved plans will be suitable for a large number of eligible employers, so most employers should be able to find a suitable prototype plan.

Puneet:

Now let's talk bit about standardized versus non-standardized 403(b) prototype plans and the differences between the two types of plans. A 403(b) prototype plan is considered standardized if employee salary deferrals are the only contributions that can be made to the plan, or if the terms of the plan satisfy uniform coverage and nondiscrimination requirements with respect to any other contributions under the plan. Further, a standardized plan should ensure that the benefits, rights and features of the plan are available to all eligible employees that nonelective employer contributions are made to everyone according to a safe harbor formula, and that compensation under the plan is defined in a certain standardized way. Any 403(b) prototype plan that is not a standardized plan is a non-standardized plan. For instance, a 403(b) prototype plan that permits the adopting employer to select a method for allocating non-elective employer contributions that does not satisfy one of the Code's design-based safe harbors will be a non-standardized prototype plan. Whether a 403(b) prototype plan is standardized or non-standardized has an impact on both the scope of a plan's opinion letter and the adopting employer's reliance on the opinion letter. Since the ability to rely on the IRS's opinion letter is one of the most important advantages an employer gains from adopting a pre- approved plan, this is an important consideration for employers. Now that we all have a grasp on prototype plans, let's talk a little bit about volume submitter plans.

A volume submitter plan is a sample plan designed to comply with the requirements of section 403(b). It's either a specimen 403(b) plan of a volume submitter practitioner or a plan of a client of the volume submitter practitioner that is substantially similar to the volume submitter's approved specimen plan. A specimen 403(b) plan may include an adoption agreement, but it's not required to.

The persons eligible to sponsor a volume submitter plan are the same as those eligible to sponsor prototype plans.

Also, similar to the prototype plans, any employer eligible to adopt a 403(b) plan - in other words, public schools, 501(c)(3) organizations, churches, and self- employed ministers - may choose to adopt a 403(b) volume submitter specimen plan.

And, finally, a quick note on mass submitters. An entity can be a mass submitter if

One – it has an established place of business in the United States where it can be reached during every business day, and

Two – it submits opinion or advisory letter applications for at least 30 prototype sponsors or volume submitters, each of which is sponsoring the same basic plan document or specimen plan on a word-for-word identical basis.

Jason:

It's also possible to sponsor a plan as a "minor modifier" of a mass submitter's 403(b) prototype or specimen plan. A minor modifier plan contains only minor changes from the mass submitter's plan document – in other words, a change that does not require in-depth technical review in order to receive a favorable opinion or advisory letter.

If you decide not to use a pre-approved 403(b) plan, you'll need to draft your own individually designed plan.

Puneet:

Well, that's it for our overview of pre-approved 403(b) plans. For more details on the 403(b) pre-approved plan program, see our other videos, or visit us on the Web at www.irs.gov. Just search for "403(b) pre-approved plan."