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November 25, 2014

IRS Issues Procedures for Securing Favorable Opinions on Pre-Approved Internal Revenue Code 403(b) Programs

The Internal Revenue Service (IRS) recently released a revenue procedure establishing a new program for the pre-approval of 403(b) plans.  The program opens June 28, 2013, and the IRS will begin accepting applications for opinion and advisory letters on whether the form of prototype plans and volume submitter plans meet the requirements of Code Section 403(b).


The Internal Revenue Service (IRS) recently released Revenue Procedure 2013-22 (the Revenue Procedure), which articulates the procedures for vendors sponsoring pre-approved Section 403(b) plans (that is, prototype and volume submitter plans designed to comply with Section 403(b) of the Internal Revenue Code of 1986, as amended) to secure a pre-approved opinion or advisory letter.  The IRS will start accepting applications for these favorable opinions on June 28, 2013.

The Revenue Procedure will be used by Section 403(b) plan vendors seeking to secure a favorable opinion letter on any prototype or volume submitter Section 403(b) plan they offer to clients.  Nonprofit organizations sponsoring Section 403(b) plans will not seek their own opinion or advisory letter on their individually designed plans as that is not the purpose of this Revenue Procedure and the IRS has yet to issue procedures on how to secure a favorable determination letter for an individually designed Section 403(b) plan. 

Note that any Section 403(b) plan in existence today is an individually designed plan.  Nonprofit organizations that purchased “model” Section 403(b) plans from vendors in the past still have individually designed plans because, prior to the Revenue Procedure, there was no legal mechanism under which a vendor could offer a prototype Section 403(b) plan.  Additionally, any service agreement that an organization has with a Section 403(b) plan vendor more likely than not contains language stating that the organization needed to have the “model” plan reviewed by counsel for legal compliance.  As such, responsibility for the legal upkeep of any Section 403(b) plan has always been on the plan sponsor.  Although most vendors have done a good job of keeping these “model” plans up to date for law changes, technically they were not responsible for “maintaining” these plans (since they were not true prototype plans) on an ongoing basis. 

However, because Section 403(b) plan vendors can now submit their “model” Section 403(b) plans to the IRS for favorable opinion letters on their compliance with final Section 403(b) regulations, it’s anticipated that any organizations currently using a “model” Section 403(b) plan eventually will be approached by their vendor to migrate to any pre-approved Section 403(b) plan on which it is successful in securing an opinion letter on from the IRS.  Organizations are not required to change, but may want to explore this option (particularly if the pre-approved plan more or less mirrors their existing plan), because the organization can then shift responsibility for the legal upkeep of the Section 403(b) plan to the vendor and have the added protection of being covered by a favorable IRS opinion.  On the other hand, if the organization’s Section 403(b) plan is complex (e.g., has different matching contribution for different groups within the controlled group), it may not squarely fit within the pre-approved plan and may need to remain an individually designed plan. 

Of special note is that the Revenue Procedure includes a remedial amendment provision that allows sponsors adopting the approved plan to retroactively correct any Section 403(b) plan document failure by timely adopting the pre-approved plan.  This particular provision meshes with the recent 403(b) Fix-It Guide on fixing Code Section 403(b) plan failures released by the IRS on February 21, 2013.  (See “IRS Issues 403(b) Plan Fix-It Guide” for more information.)  As IRS procedures are refined for reviewing and approving Code Section 403(b) plans, the IRS is providing multiple avenues for assisting 403(b) plan sponsors in meeting these new compliance objectives.

Note also that while the Revenue Procedure does not permit individually designed plans to obtain determination letters, the Revenue Procedure may be the first stage of an IRS program to eventually roll out a favorable determination letter process for individually designed Section 403(b) plans.  This is likely still a few years off, but as the IRS slowly migrates Section 403(b) plans to the same reporting and disclosure platform as Section 401(k) plans (e.g., the written plan document requirement in the final Section 403(b) regulations, the ERISA audit requirement and the broader Form 5500 filing requirements established in 2009, the introduction of a voluntary correction program in 2013, etc.), individually designed Section 403(b) plans should be able to secure favorable determination letters in the future eventually. 

© 2014 McDermott Will & Emery

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About this Author

Partner

Mary K. Samsa is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.

Mary has more than 15 years of experience and has represented a wide range of organizations including, but not limited to, Fortune 100 public companies, privately held companies, multinational organizations and not-for-profit hospital systems as well as educational institutions.  Mary’s primary practice focuses on executive compensation (for both taxable and tax-exempt entities) where she regularly advises on nonqualified deferred...

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Partner

Todd A. Solomon is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Todd focuses his practice primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements.  He also counsels privately and publicly held corporations and tax-exempt entities regarding fiduciary issues under ERISA, employee benefits issues involved in corporate transactions, executive compensation matters, and the...

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Associate

Joseph K. Urwitz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Boston office.  He focuses his practice on employee benefits, executive compensation and ERISA matters.  Joe’s experience includes ERISA fiduciary issues, benefits issues faced by non-profit entities, executive compensation and deferred compensation arrangements, equity award plan design, employment and severance arrangements, qualified plan work and employee benefits matters arising in mergers and acquisitions.

Joe received his J.D. from the University...

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