Don?t Look an IRS Gift Horse in the Mouth: Two Valuable Opportunities for 403(b) Plan Sponsors in 2017

Although most people don’t associate the IRS with gift-giving, it announced two valuable opportunities in 2017 for 403(b) plan sponsors that may merit some gratitude. If used in tandem, these opportunities can be used to correct most document failures and many operational failures retroactive to 2010 without any IRS filing, providing plan sponsors with the chance for a fresh start and greater assurance their plan document is fully compliant with all applicable IRS requirements.

The first opportunity was the announcement by the IRS in January 2017 that 403(b) plan sponsors will have until March 31, 2020, to retroactively amend their plans effective back to January 1, 2010 (or the original effective date of the plan, if later), to correct any errors in their 403(b) plan documents and related operational failures. Generally, a plan sponsor cannot amend a plan for a prior year to correct a document or operational failure without filing a correction application with the IRS. But this “remedial amendment period” allows 403(b) plan sponsors to correct eligible failures without such a filing, thus avoiding the time and expense of preparing a formal IRS filing and paying associated compliance fees.

This first opportunity is even more powerful in combination with the second opportunity, in which the IRS issued opinion letters this spring approving certain 403(b) plan documents submitted by a variety of document providers. The document providers now offer these pre-approved plans to 403(b) plan sponsors for adoption for the first time, and plan sponsors who choose to adopt a pre-approved plan can rely on the document provider’s IRS opinion letter. Such reliance provides the best possible assurance that the plan document satisfies all applicable IRS requirements and can serve as some level of protection in the event of an IRS audit. The pre-approved document can also serve as a guide to identify failures and evaluate corrections that may need to be made. Similar pre-approved plans have been available to 401(k) plan sponsors for many years and are widely used.

Most document providers are already offering pre-approved 403(b) plan documents to their clients and are working with plan sponsors to complete the plan restatement process fairly inexpensively. Plan sponsors should ensure that the pre-approved document can accommodate the 403(b) plan’s design. Additionally, this restatement is an opportune time for a “compliance review,” with plan advisors helping to identify and implement any necessary corrections.

Although March 31, 2020, may seem far away, 403(b) plan sponsors would be wise to confer with their 403(b) plan advisors and document providers in the near future to evaluate their current plan documents and operations.

Please contact Kristi Hill at 602.916.5353 or khill@fclaw.com, or Ryan Curtis at 602.916.5426 or rcurtis@fclaw.com if you have any questions or need additional information.