Legendary UCLA Men’s Basketball Coach John Wooden once asked, “If you don’t have time to do it right, when will you have time to do it over?” If you sponsor a 403(b) plan, the IRS may have helped answer this question for you. In our prior blog, we highlighted the new Employee Plans Compliance Resolution System (“EPCRS”) guidance set forth in Revenue Procedure 2013-12 (the “Procedure”). This procedure also provides new guidance for 403(b) plan sponsors. Most critically, plan sponsors who did not adopt a written plan document by December 31, 2009 may submit a written plan document to the IRS by December 31, 2013, with a 50% reduction in penalty. The discussion below explains more about the new guidance for 403(b) plan sponsors, and how they may mitigate risk in the event of an audit by taking some proactive steps.

Plan Document Issues.

We encourage any 403(b) plan sponsor who was late in adopting a written plan to take advantage of this 2013 relief period. A sponsor can only take advantage of other relief regarding administrative and operational errors if it has timely adopted a plan or taken advantage of this relief.

Generally, 403(b) plan sponsors use the model plan document provisions set forth in Revenue Procedure 2007-71. These provisions have not been updated for law changes such as the Pension Protection Act and “HEART.” As this Procedure reminds us, the IRS is developing a determination letter program for 403(b) plans. Once this program is introduced, the IRS will provide a remedial amendment period to allow plan sponsors to amend their plans retroactively. This guidance suggests that late adopters can likewise use the model provisions, without worrying about subsequent guidance. (Plans must nonetheless be operated in accordance with any statutory or regulatory changes.)

In theory, vendor cooperation could also be an issue in the context of a plan document correction, but we doubt this will be a problem, as a practical matter.

Administrative or Operational Errors.

The sponsor of a 403(b) plan faces a correction hurdle not faced by qualified plan sponsors: the plan may consist of contracts between individual participants and various vendors. Those contracts may prohibit certain forced distributions, yet such distributions may be required under EPCRS. The Voluntary Compliance Program requires sponsors to submit a statement affirming that it contacted all other entities involved with the plan, and has been assured of their cooperation to implement the correction. The sponsor may have difficulty identifying all vendors, including some of whom may be no longer receiving participant contributions. Further, a vendor may refuse to cooperate on the basis that the proposed correction would violate a contract provision, or state insurance law. This vendor issue first arose when the IRS issued guidance regarding 403(b) plan termination, where some vendors balked at employers’ attempts to terminate plans. The IRS has yet to issue guidance to alleviate vendors’ potential concerns, or to assist employers in getting beyond this hurdle. In requiring a statement regarding cooperation, the IRS appears to acknowledge that this hurdle could stand in the way of achieving compliance, without offering any assistance to surmount that hurdle.

Next Steps.

We recommend the following next steps for all 403(b) plan sponsors:

  1. Confirm that the sponsor adopted a plan document by December 31, 2009. If not, adopt a document and utilize the Voluntary Compliance Program by December 31, 2013.
  2. Review the IRS list of common 403(b) plan errors, and consider whether this plan may have committed any of these errors.
  3. Discuss a self-audit of plan procedures, to reduce the likelihood of errors and mitigate risk to the employer in the event of an audit, with legal counsel.
  4. Apply the guidance in Revenue Procedure 20013-12 to address any errors that are identified.

The vendor problem may make addressing errors challenging. But as Coach Wooden would say, “Don’t let what you cannot do interfere with what you can do.”