Tax-Sheltered Annuity Plans, 403(b) Update
Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the 403(b) Plan Update phone forum. This information is current as of April 30, 2010. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.
Moderator: Ladies and gentlemen, thank you for standing by. Welcome to the 403(b) Plan Update phone forum. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. Today’s conference is being recorded. I would now like to turn the conference over to your host, Mr. John Schmidt. Please go ahead, sir.
J. Schmidt: Thank you, Corina. Hi, everyone. I’m John Schmidt, the acting Director of Customer Education and Outreach for Employee Plans at the IRS. Thanks for dialing in to our phone forum today entitled 403(b) Plan Update. Please be advised that the following program, including questions and answers will be recorded and maintained in accordance with federal record-keeping laws. This recording is a work of the U.S. Government, and is in the public domain. A transcript and/or audio recording of this program may be made publicly available on our Web site, www.irs.gov.
Today we will be hearing from Cheryl Press, Senior Legal Council at the Internal Revenue Service Office of Chief Council, Tax Exempt, and Government Entities. Cheryl is the principle drafting attorney for the final regulations on section 457(b), eligible deferred compensation plans of state and local government and tax exempt entities. She was the reviewer for the recently issued section 403(b) final regulations and is currently working on guidance for ineligible plans under section 457(f).
We will also be hearing from Jason Levine, Tax Law Specialist in the Employee Plans Division, tax and government entities. Jason is a member of the 403(b) cadre and is responsible for assisting and establishing the upcoming preapproval program for section 403(b) plans interfacing with taxpayers concerning 403(b) plan issues and providing technical guidance to other members of TEGE regarding section 403(b), its regulations, and related guidance.
At the end of Cheryl’s and Jason’s presentations, there will be a question and answer session. If you want during their presentation, you may email your question to email@example.com with your phone number, and one of the speakers will respond to your question as time permits. Note, Cheryl or Jason will respond only to you via phone, so please don’t forget to include your phone number.
We will email a certificate of completion to everyone who registered for this session and who attends the full session. Enrolled agents are entitled to continuing professional education credit. For tax professionals other than enrolled agents, consult with your licensing organization to see if it will provide continuing professional education credits for this session.
The IRS has lots of 403(b) information on our Web site at www.irs.gov/ep. You can also get there by going to the main IRS Web page and clicking on the Retirement Plans Community tab along the top. One you’re there look to the left-hand navigation bar and click on Types of Plans. Then select 403(b) plans. You might also want to subscribe to one of our free electronic newsletters. The link for newsletters is in the left-hand navigation bar. We have two news letters, a Retirement News for Employers which is directed towards employers sponsoring a retirement plan, and the Employee Plans News which is directed at professionals who practice in the retirement area. Check out our Web site and please subscribe to our newsletters.
Cheryl’s portion of the presentation will be loosely based on a PowerPoint that can be found on the RetirementPlans Community that I alluded to just a minute or so ago. If you are by your computer and you want to follow along there, information can be found in the left navigation bar under the heading Types of Plans where you would then go and select IRS 403(b) plans, and the PowerPoint presentation I believe is the top one listed on that page. Without further ado, here’s Cheryl Press.
C. Press: Hi, good afternoon, and I guess good morning for those on the West Coast. This is Cheryl Press. As John said, I’m a Senior Council at Chief Council IRS. Basically, what that entails is writing a lot of the guidance that you’re going to be hearing about today.
Jason and I are going to be discussing different stuff. What I’m going to do is give a little bit of refresher course and update on the 403(b) final regulations, some of the issues and questions that have arisen since that time that maybe we haven’t addressed in additional guidance, and Jason will follow up with a highlight of some of the guidance that has already been issued as well as discuss, as John said, the prototype plan rep reg that we’ve been working on for quite a while and hopefully will be out this summer. After that I’m going to go through some other guidance that we’re working on that affects that tax exempt and/or public schools that are the primary stakeholders for the 403(b) community. If you’re not a 501(c)(3) or a public school or someone who works with a 501(c)(3) or a public school, you’re probably on the wrong Webinar. Let me just get started.
I’m hopeful that you’re all aware that we came out with really extensive final 403(b) regulations in 2007. For a long time 403(b) was kind of the Wild West, a lot of attention was being paid to 401(k) plans. Then in the early 2000s we did a complete overhaul of the 457(b) governmental eligibles, and it did seem as though, well, poor 403(b). We allow rollovers among these plans and they share a lot of the same sections and requirements, and nothing was done with 403(b).
A decision was made obviously to do some work with 403(b) starting in 2005, and in 2010 we’re still working on 403(b) and continuing what is going on. Generally, we did the 403(b) regulations to really make it clear that 403(b)s are not all that different than 401(k) plans and to the extent relevant 457(b) governmental.
Now, one of the biggest changes to the regulations and something I’m going to take a little bit of time to talk about because there are kind of a lot of issues that have come up is that a 403(b) program must now be maintained pursuant to a written defined contribution plan. Now, what does that mean in simple terms? It means before these regs were final, and after of course we had a transition period that Jason will talk about, you didn’t need a written plan unless you were subject to the rules under ERISA. You all now have to have a written plan.
What does that mean? Well, it means that you must have a written plan and under the regulations that the written plan must satisfy 403(b) in both form and operation and contain all the terms and conditions for eligibility, limitations, and benefits under the plan. Now, for awhile there that sounded like, whoa, I didn’t do anything before, and now I have a written plan, and that’s right. If you currently don’t have a written plan and don’t fit in one of the transitions rules, you’re probably in trouble, that you need to have a written plan. The first thing I want to point out, get a written plan, better late than never.
What’s essential in the written plan, is you don’t need a written plan like you would for an ERISA written plan. It doesn’t have to be 2500 pages of legalese. What you need to have are the essential elements that reflect what your plan provides. What are these essential elements? Let me just say that some of these things I’m going to talk about are towards the end of Jason’s PowerPoint or the PowerPoint you should have hopefully in your possession.
The one essential element that has to be there is that you have to show that you meet the eligibility which we call the nondiscrimination rule which we further call universal availability. What that means is if you offer the 403(b) to the left side of the room you also have to offer the 403(b) to the right side of the room. It has nothing to do with the fancy qualified formal ERISA or code that you’re familiar with 401(k). The basic eligibility is that everyone has to be invited to this party unless they’re going to defer less than $200 or they’re in another plan or under another of the exempted groups. One of the other changes that we made with the regs that you want to be aware of is that the exempted list got much smaller after the regs, and to the extent it wasn’t a statutory exception you can no longer exclude people.
What else has to be in your plan—benefits. The participant has to know what the benefits provide, what they can defer, and within that spot you have to have the dollar limitations that the plan is subject to. That would be both for your deferral as well as for anything your employer wants to give you in match or in a nonelective, if they’re feeling just very generous as well.
Another thing that’s required is someone has to be able to tell from your written document what available investments are under the plan, and that’s the big difference. Prior to having to have any sort of written plan, 403(b) you would I guess sign on with a vendor and maybe offer a salary reduction agreement, but the employer really didn’t need to be involved. The employer didn’t have to sponsor the plan, and the employer was not necessarily having knowledge of all the available investments that were being deferred under the arrangement. That has changed. To the extent moving forward under the new reg, you need to site them.
Now, one thing people ask is, boy, does that mean every time I change a vendor, add a vendor, delete a vendor that I have to amend my plan? That can be costly. Sometimes if you’re a school district you’ve got to go through the government. You’ve got to go through the board. No, you don’t have to do such a formal amendment, but you do have to have an addendum on your plan that will list all the available for participating vendors.
That’s very important, particularly with respect to if in fact we look at your plans we have to know where the money is. Part of the reason we have this big change is the Wild West world of 403(b). Our agents would go in or people would come in for correction, and the employer did not know where the money was, where the money was invested, if they were multiple loans or multiple hardships. You must list the available investments. It could be in an addendum, but it has to be there.
Finally, you need something dealing with the time and form of distribution. That normally deals with when participants can get a distribution under the plan. In addition it also deals with when they have to start taking a required minimum distribution under the plan. If you have all this stuff and nothing else (I guess Bob used call it the giant paperclip), you probably have a good written plan. So long as you have these essential elements and don’t go off doing anything that’s not part of those essential elements, you’re going be okay.
Now, what if you want to offer stuff more than the essential elements? We’ll call those the optional elements. You want to offer your participants loans. You want to offer them hardship distributions, auto enrollment, Roths, after-tax deferrals, the 50 near plus service if you fit into that catch up, the 50 plus catch up, the plan-to-plan transfer, inservice contract exchange, five-year post termination provision (I’ll try and go these a little bit as we move forward.), and finally, you want to terminate your plan. You want to add those things; those become essential elements of your plan. When we started out we said not only do you need a written plan, but you have to follow both the form and operation to satisfy 403(b). If you want a loan or a hardship, let’s stick with those to be easy, but it has to be in your plan.
Now, one question that has come up since the regs have come out and we’re hoping to answer in subsequent guidance, but I’ll give you a heads up because you’re getting your CLE credit, so you’ll learn a little something else. Well, what if I have three different vendors and two offer and one doesn’t. Is that okay? Sure, that’s okay, but you have to make sure in your plan document that you offer loans. Same way if you have no vendors that offer loans. You want to say in your plan documents you don’t offer loans. It’s okay to have the underlying vendors do both, but then you have to cover that in the plan. Not every vendor has to offer it, but you have to provide for it.
I suspect the people that want to invest in a vendor that offers a loan will put their money in that investment. A participant who doesn’t want a loan or doesn’t care, they can put it in both, but to the extent you have multiple vendors, you need to provide for loans regardless of whether all of them are offering it.
Let’s talk a little bit about multivendor plans because this has been a big question as well. I’m pretty familiar with this because when we did the 457 regulations and the 457 regulations are basically deferred comp for state and local government, so some of you who are public schools you may also have 457(b) deferred comp. Now, I lost my train of thought. Somebody left the room.
Yes, you want to get back to the multivendor plan. What happened was you’re going to go with five different vendors, or let’s even make it two different vendors to keep it simple. You’re going to go with (I’m just pulling anybody. I don’t have any favorites.) Fidelity and Hartford, one custodial account, one annuity contract provider. Both of them now or in the future when they come in for their prototype rep proc are going to be offering a plan, but they’re not really offering a plan. What they’re offering is a plan that’s attached really to their investment.
If you sign on with three different vendors and you sign on to three different plans, what happens? Essentially, unless those plans are all exactly the same, which they’re probably not, you’re still going to need to have something in your little essentials that has the essential that says you can have loans. You have your dollar limits. You have your 401(a)(9) distribution, but ultimately, as the employer you are responsible for that plan.
If you change vendors and no longer work with that vendor, does that mean the plan disappears? No, it means the investment is no longer offered under that plan, and what you do is you are just changing providers. Ideally, you want to keeping mind that when you’re working with multiple vendors, which is fine, you either want to have kind of a skeleton plan that deals with what you’re doing or you want to adopt one of the plans and have those vendors either sign on or not if that’s what they’re willing to do.
You really do have to be careful that you don’t have one plan that says you can have loans and one plan that says you don’t have loans because you’re treating the vendor’s contract as a plan. No, you need to say what you’re offering, and whatever’s underlying is underlying.
Which comes up to the next big question that we are getting a lot of and that is I have a plan and then I have all these contracts out there. My plan has been in existence before 403(b) came into existence. We have annuity contracts out there. We’ve got custodial accounts. We have 90-24 transfers which were the old kind of transfers that permitted employees to go ahead and make a transfer out of whatever arrangement that employer was offering without asking the employer’s permission such that you could basically just choose your own vendor.
The other kind of contract or custodial accounts we have out there are called orphans kind of contracts. That’s where maybe your employer 20 years ago offered Metropolitan Life. They haven’t offered it since then, but there are still employees who are investing in Met Life.
What do you do with all those? Well, the first thing you want to know (and Jason’s going to talk about in detail) is we basically said if you’re dealing with preexisting 9024 contracts or orphan contracts, vendors you’re no longer dealing with, we don’t treat those as part of the plan, maybe under very limited circumstances, but generally, you don’t have to worry about those either as a new vendor coming in with the employer or as the employer. We do have a minor requirement with orphan plans or orphan contracts that we would like the employer to look if someone comes in for a loan if they had some knowledge that participant had already invested in contracts whether of not they’ve had a loan, but pretty much moving forward we wanted a clean slate. How we drafted this was as a clean slate.
One of the biggest questions we have is, okay, I have this plan. I have all these contracts out there. What is more important? I am going to tell you that the plan is more important than the contract. The plan is basically what is your contract with your employee as to what the plan provides, the benefits, loans, hardships, whatever. The contract, you could have contracts with completely all different diverse sorts of requirements. Ultimately, under the regulation, the plan will always prevail.
Let me give you an easy example. You had a lot of 90-24 contracts that provided for loans or your employees had 90-24 contracts that provided for loans. Now, moving forward as the employer you say, you know what, I don’t want to deal with all this loan business. I don’t want to worry about it. I don’t want to do payroll withholding, and I don’t want to have to deal with all those requirements. The plan now says no loan.
For example, I have an investment provider who called me and said, Mr. X has a 90-24 contract and he wants to take a loan, but the employer won't sign it. He said he’s not responsible. Yes, that’s correct. The 90-24 is over. The employer is not responsible for that. Now, that doesn’t mean that you can't go ahead and transfer that money to another investment. It just means the employer is not going to get involved. If that vendor that you want to transfer to wants that employer to be involved, you’re going to be out of luck. That is something different.
The employer is only responsible moving forward once you have a plan. In a situation where an employee comes and says I’d like to add this vendor to the plan. I really like the investment. In that case the employer can say okay, but they have to enter an information-sharing agreement, add that vendor to the addendum, and keep track.
To the extent your 90-24 and orphan, those are still good 403(b)s. They don’t have to be cashed in. They’re not ineligible. They’re just like they were before the plan came in, but they’re not part of the plan. Hopefully, the one thing that the vendor is going to look to is just to see whether in fact there are eligible rollover distributions involved and that the 403(b) is in fact following the rules of 403(b) because even if you’re not part of the plan to maintain tax deferral you still have to follow the 403(b) rules. You’re not out there on your own.
Let me talk a little bit just about termination. That is something that was very new. Prior to I guess the final regs I guess people went ahead and terminated, but there was nothing in the regulations saying you could terminate. Now, if you want to have the option of ever terminating, that has to be in your plan. You have to have it in there. You can't just go ahead and terminate without it being in there because then you are not following the form of your plan. You’re just operating as though you had termination in your plan. That’s not permitted. You want to go ahead and add that termination provision in.
After Jason’s discussion I’m going to talk a little bit about some of the guidance, and this is one of the areas where we are going to be doing additional guidance on, but Jason and I are working on that and answering hopefully a lot of the questions that have been raised. Maybe you’ll be asking in the last half hour.
One other thing I want to talk about before I hand it over to Jason in a couple of minutes is this five-year post termination provision. Now, this is something that’s really sweet. The only people that can get this are 403(b) plan participants, but you’re really not even participating anymore. It’s actually that your employer can continue to defer on your behalf, only your employer because it has to be nonelective. The employee’s no longer working for up to five years after you terminate.
Let’s take for example we have a Government School Superintendent who his leaving employment. It’s in the plan as an optional provision, but it’s there now that they have a five-year post termination provision. That’s okay. He can go up to his last year’s employment 415 limit which is quite high. Finally, if you are dealing with a 501(c)(3) Executive, you do have to worry about the nondiscrimination rules being satisfied. That is something the government does not have to worry about.
Two things you want to remember, it has to be nonelective. If the employee’s no longer working, there’s nothing for them to defer at that point, so your employer has to want to give you the money. Another thing is a lot of you out there we know that you’re also using your sick and vacation deferral in there to participate and put money into that five-year post termination.
One thing that we’ve seen a lot of lately, particularly with schools and not-for-profits because of the economy and because of budget constraints, is a lot of people not only deferring into this five-year provision or their 403(b) sick and vacation, but also early retirement incentive pay or severance pay. That is not sick pay, vacation pay, or paid time off pay which clearly the services already said you can go ahead and defer. We’re seeing deferrals of early retirement into these five-year to the 403(b). Severance meaning not everything you sever at employment, but severance that you’re getting because you’re leaving early or because you’re being laid off as a policy matter currently cannot be deferred.
I just want you to be aware of that. When you’re talking about termination pay or severance pay, you have to break down what’s in the pot—sick pay okay, vacation pay okay, back pay probably okay. Incentive pay for leaving early or for giving up tenure or other things, don’t put it in there or be careful.
Finally, I want to talk just a little bit about some other things that happened in the reg that Jason’s going to pick up on some of the guidance. One is the vesting, that we permit vesting under the regulation. The other thing is that the regulations go through all the rules very clearly as to what are the essential elements. I believe I’m out of time. I’m going to turn it over to Jason so he can update you on all the really new stuff that we’ve been doing to assist you guys in monitoring and doing your plans.
J. Levine: Thanks, Cheryl. Before I get to the substantive part of my discussion, I wanted to just mention a few quick housekeeping items. Many of you who are on this phone call I’m sure have talked to or dealt with Bob Architect in the past on 403(b) issues and I just wanted to let you know that as this phone forum exemplifies we’re still conducting a very vigorous outreach to the 403(b) community.
Well, let me just also say you can turn to the slide show that you were sent in conjunction with this. If you look at the presenter slide, the second slide, you’ll see you have my email address there. We’re providing a lot of different avenues for you to really ask your questions and contact the IRS with your 403(b) issues. One of them interestingly enough is my email address, but I would also encourage you to use the number that I have there which is the 403(b) question hotline, which very conveniently is Bob Architect’s old phone number. If you had his phone number on your speed dial, you don’t need to change the setting. You can keep hitting that button.
Also, I am also part of a four-person cadre which deals with these types of questions. In addition to my email address there’s also an email that you can email your questions to called firstname.lastname@example.org. The reason I give you that is because I don’t work exclusively on 403(b) issues, although I do spend a significant part of my time on that, so I may not be able to get to your questions as quickly as you might like, but one of the other cadre members may be able to respond to it more quickly depending on their work flow. That’s a good resource for you to use with some of your questions. Again, I want to encourage you to avail yourself of the hotline which we check regularly and respond to regularly, the email@example.com email address, or you can also email me at my email address.
Now, getting onto the substantive part, Cheryl had mentioned as one of the really tectonic changes brought about by the regulations is this written plan document requirement that for many 403(b) plans represents the first time they’re required to actually have a written plan document in place. Really, the timing of this year’s phone forum is really kind of wedged between these two huge events, one being the passage and the effective date of the final regs. The second big change will be this preapproved program that we’re working on finalizing as we speak. That will for the first time allow 403(b) plans to get approval on prototype documents and have employer reliance on those documents.
What I wanted to do here with you over the next few slides is talk about, because the service recognizes that this is a huge change in the 403(b) world, we’ve put in place some transitional rules and some transitional relief to help ease the community into this new regime. If you turn to, I think it’s slide four that talks about the written plan requirement, let me walk you through this a little bit.
Now, the written plan requirement was originally supposed to be effective on 1/1/09, which is the general effective date for the final regulation. Instead what we did was we provided some transitional relief for 2009. This transitional relief can be found in Notice 2009-3. What this did, it really wasn’t a free pass saying there’s no written plan document requirement. What it did was it merely pushed back the date which you needed to adopt a written plan to the end of 2009 if you met certain other requirements.
What those basically are is that you needed to have a written plan document in place and adopt it as of 12/31/09. You needed to operate your plan according to a reasonable interpretation of Code Section 403(b) and the final regulations, and to the extent applicable, you needed to make best efforts to correct any operational defects in your plan during the 2009 plan year. By that what we mean is, as Cheryl had said, now for the first time many 403(b) plans have to be in both operational compliance and compliance as to the form of their written plan. If you put a plan document in place during 2009 that in some way was inconsistent with the operation of your plan, you needed to make a best effort during 2009 to conform the operation of the plan to that plan document.
Now, what would happen then is if you took care of all those requirements you were in complete compliance with 403(b) and the reg with respect to the written plan document requirement during 2009. Now, one of the big benefits of this is that this tees you up. If you complied with 2009-3, it tees you up for the prototype program which I’ll get to in a moment.
One of the things that I did want to make you aware of is we’ve gotten some questions as to what does it mean to make best efforts to do operational corrections for your plan during 2009. Slide number six talks about really applying the existing IRS corrections program at the time which is EPCRS. That can be found in Revenue Procedure 2008-50. The best efforts to correct, they really fall along the general principles of the EPCRS which means, again, to the extent applicable to the correction: restore the benefits; make sure the application of the correction is done consistently; and make sure that the correction put in place is both reasonable and appropriate. We’ve got some questions on that, and I think that offers you a good guideline as to what you should have done in that case.
I’ll note at this point, too, that there’s an updated version of EPCRS, a new Rev. Proc. should be coming out very soon. It will be coming out this year. It’s being prepared and finalized with the written plan document requirement of 403(b) in mind, so it will address for the first time the written plan document requirement under 403(b).
Now, if you could turn to the next slide, what this transition relief for 2009 consisted of, it means that there will be no written plan form failure defects in 2009 if you did this. That means that these written form failure defects would be the absence of a written plan or if you failed to amend an existing plan document that you may have had to comply with the final regulation. Again, if you complied with 2009-3, you shouldn’t have to worry about any of these problems.
The final note to really make about the 2009 transitional relief is that it only applies to the 2009 calendar year, and it can't be relied on with respect to the operation of your plan for any subsequent years. For example (and we get this question a lot) if you’re the plan sponsor and you fail to adopt a written plan document by the end of 2009, but then you adopted it early January 2010, that’s not compliant with the final reg, and it doesn’t qualify for the relief under 2009-3.
It won't help to adopt it, say, January 15, 2010, but then make the effective date as 1/1/09. That’s not a fix. Since it did not comply with the relief for 2009-3, it cannot be considered compliant back to 1/1/09. Really, what you need to do there is you need to come in through EPCRS to correct if you want to have employer reliance on that period.
You can turn to the next slide. This discusses the initial remedial amendment period that was announced in Announcement 2009-89 just as an initial matter. No pun intended. This phrase, initial remedial amendment period, is not a term of art. It’s not an official term. It’s just something that I’m using because this is really the first time we have a remedial amendment period for a 403(b) plan.
What Announcement 2009-89 said, and this was released late last year. It announced the IRS’s intention to publish some upcoming revenue procedures that would give guidance as to how to obtain opinion letters for prototype and other preapproved plans and to obtain determination letters for individually designed plan. It also noted that if the proper conditions were met there would be a remedial amendment period beginning on January 1, 2010. Again, the real purpose of this 2009-89 is to acknowledge, again, the large transition that’s being made for many employers at this point and also to kind of create a seamless structure where if everything is followed properly you’ll have a continuous plan document and continuous reliance on that plan document from the time you put it in, if no later than in 2009 to whenever it is that you adopt and apply for either an opinion letter under the preapproved program or an individual determination letter. If everything is done timely and correctly according to the Rev. Proc., you’ll have reliance and a remedial amendment period to correct defects going back to January 1, 2010.
Okay, you can go to the next slide. Again, this is pretty much stating what I just said. The remedial amendment period will be retroactive to 1/1/2010, and you’ll have employer reliance starting on that same date if the conditions for relief for 2009 under Notice 2009-3 are met and you take the additional step of doing one of the following: Adopt a preapproved plan with a favorable opinion letter; or apply for the individual determination letter when that program becomes available.
Again, if you put a plan in place by 12/31/09 and met the other conditions of 2009-3 and you avail yourself of the preapproved program or the determination letter program that are coming up, you’ll be fine. There’s no reason to worry about if there’s going to be time to make corrections and adjust your plan. You’ll have a remedial amendment period and employer reliance.
One of the things that we should note, we put this requirement in to have your plan in place by 12/31/2009. We did provide model plan language in late 2007, and that can be found in Rev. Proc. 2007-71. Now, this was aimed primarily at public schools, but it also provided a lot of provisions that were useful for 403(b) employers who were not public schools, so there was really a “canned document,” if you will, that we had provided to the public back in late 2007 and really provided, I think, plan sponsors an excellent opportunity to have something in place by the end of that 2009 deadline.
Please go to the next slide. What this means to have a remedial amendment period, now, the people on the call that are familiar with the qualified plans world, you’re probably familiar with this concept, but for many in the 403(b) world, you just deal exclusively with 403(b) plans. This is a bit of a foreign concept or a new concept. Remedial amendment period means that an employer may correct any form defects that are in the plan retroactive back to the beginning of that remedial amendment period. Whenever it is that you put this preapproved plan in place or you get your individual determination letter, if something comes out that there’s a form defect, you can correct it and have that retroactively applied back to January 1, 2010.
Again, that’s that seamless gap I’m talking about. You’ve put in your document by 12/31/09, so you’re good for the 2009 year, and then if you apply for a determination letter or an opinion letter with these upcoming programs, you have an opportunity to correct and get reliance starting the very next day which is 1/1/2010, so 2009 is covered. Then starting on 1/1/2010, you’re covered going forward.
Now, a item to note here is a plan sponsor, and this is a little in the weeds, but for those of you who may be wondering about this issue, a plan sponsor may choose to amend the plan document retroactive back to 1/1/2009, but for purposes of determining whether the plan was in compliance during 2009, only the written plan document that was put in place as of 12/31/09 will be considered. Basically, what that means is in order to get this entire remedial amendment period, remember, you had to meet those 2009-3 conditions, and that included a plan document in place by 12/31/09. That will be the operative document for this purpose.
Now, for new plans, plans that are established on or after 1/1/10, it’s the same concept as with the other ones except the employer reliance and remedial amendment period effective date will be the later of 1/1/10 or the new plan effective date. If you put a plan in place effective July 1, 2010, that’s where you’ll have reliance back to.
The next slide we talk about Announcement 2009-34. This was issued last year. This included the draft of the Revenue Procedure that sets forth all the different conditions for applying for an opinion letter for a prototype plan. This was the draft preapproved program. In addition to this, we also released a draft Listing of Required Modifications, or LRMs, which is essentially sample plan language that can be used.
After these were issued, Announcement 2009-34, we received really a tremendous amount of very helpful comments from practitioners all over the country. We appreciate these comments, and we encourage the comments all the time. I can let you know that every one of them was read and many of them have been incorporated or are being incorporated in to the final product. I’ll come back to that concept a little bit later.
Going to the next slide, a couple points I want to make about this program is that adopting a prototype plan is voluntary. It’s not something that is required. In fact, getting a determination letter or an opinion letter is a voluntary act. It’s not required. There are advantages to getting an opinion letter or a determination letter. It’s essentially the IRS’s “blessing” that the form of your plan meets the standards and requirements that we set forth in the Code and in the Regulations.
A couple of other items that were contained in this draft were no prototypes were permitted to allow nonelective vesting schedules. In other words, all of the contributions to the prototype plan in the draft had to have full and immediate vesting. Also, the draft program did not allow for specific provisions related to church retirement income accounts under 403(b).
Now, there’s been over a year since this was prepared, and there’s also been, like I said, a flood of comments. While I can't speak definitively to what’s going to be in the final Rev. Proc. because it hasn’t been released yet, the issues that were raised consistently were the idea that we should put in a vesting schedule for nonelective employer contributions, a vesting schedule akin to what’s there for qualified plans under Code Section 411 and also that prototypes can be allowed for church plans, specific provisions for church plans. All I can say is that those comments have been well received and are being considered very seriously.
In addition to that, we also received comments as to whether we would also include a volume submitter component to the preapproved program and is also one that is being well considered. The volume submitter would also, in theory, have advisory letters instead of opinion letters issued for them, again, much like the qualified plan world. Again, while I can't speak to the final document, these are items that we’ve been considering and have been analyzing in great detail.
One final point that I wanted to make with respect to a difference or at least something we’ve been discussing that is a comment to the draft is this notion and Cheryl touched upon it before which talked about plans versus contracts. All the preapproved programs will have to have a provision in there that says in the event there’s a conflict between an underlying investment vehicle and the plan document, the plan document controls.
Now, what this means is to use Cheryl’s earlier example of you may have three vendors that offer investment vehicles under your plan. Two of them allow loans. One of them doesn’t. How can a plan document be consistent with that? Well, the plan document can simply say the plan will offer loans under the terms if and when provided by the vendors. It leaves it open to the vendors. It leaves it to the vendors to do that. If two vendors offer loans and one vendor doesn’t, those arrangements are still consistent with the plan document. The plan document can't say the plan does not provide for loans and then have one of your underlying investment vehicles provide for loans. That’s going to create a big problem for you. Again, that’s another item for the prototype program.
Turning to the next slide, what was discussed in this draft Rev. Proc. were both standardized and nonstandardized prototypes. I have a date there saying no applications for opinion letters before March 15, 2010. That date has clearly passed, so we’re still working on getting this finalized. As Cheryl has alluded to, the expectation is that the summer is what our target date is. It’s helpful expectation to have, helpful and hopeful.
Now, the other item that we’ve been working on extensively is updating the LRMs that were in draft form when this was issued. Just a couple of points I want to make about these LRMs. Again, I repeat, for the audience members who are very familiar with the qualified plans world, you’ll note that a constant theme of both Cheryl’s presentation and mine is that a lot of the 403(b) world is being essentially shepherded into more of a qualified plans construct.
I think it’s helpful when you’re trying to look to what these changes mean for you and your plan to think of them as almost qualified plans. That’s really the area that we’re going towards. Having said that, much of this preapproved program is based on the qualified plan existing preapproved programs, and the LRMs that we’ve been drafting are substantially based on the model language for 403(b) that we provided in rev proc 2007-71, but also the most recent LRMs for qualified defined contribution plans. Many of you reviewing those will see some familiar language in there.
Some points that I wanted to make about the LRMs is really what these are is they’re designed as a resource for companies and groups that want to sponsor these preapproved plans. It’s a resource bank of language that they may want to use when they’re submitting their plan documents for IRS approval. The use of the LRM language is completely voluntary, but if it is used, the plan sponsors or the drafters of the language will have at least some comfort that such language has been approved by the IRS. As I said before, the language is largely based on Rev. Proc. 2007-71 and the defined contribution LRMs in existence. One thing it does not include is any sample ERISA title I language. If you’re an ERISA-covered 403(b) plan, the LRMs really aren’t going to address any issues you may have unique to ERISA.
Quickly going through the next slide, this just basically says that there’s going to be a determination letter program that will be there for individually designed plans. That one is in the queue, and it’s going to be basically in draft form and then released in final form after we’ve taken care of the preapproved program.
Moving right along, I wanted to make a couple of points on Revenue Procedure 2007-71. This is slide 16. There still is continued employer reliance on that model plan language. What that really means is for plan sponsors that are not public schools you can rely on that language really to the extent that if your plan already received a private letter ruling that its language was good for 403(b) purposes, if you use this model language, it’s not going to disturb that ruling. It’s very limited reliance for nonpublic schools, just wanted to make that point.
Meanwhile, as the 403(b) world turns, examinations are continuing. One of the highlighted issues was what Cheryl had talked about before, which is this nondiscrimination issue for 403(b) plans. In “403(b)-speak” that means universal availability. We’re still working through some of those issues.
Some of the thornier issues that plan sponsors are dealing with are some of the exclusions you can have, as Cheryl said in her presentation: “If you cover people in the left side of the room, you also have to cover the people in right side of the room,” except these exclusion deal with people that are not even in the room. You can say, “We don’t have to put you in the room.” There are several different categories of employees like that. One of these is those that regularly work less than 20 hours. Again, this is in the regulations, and there’s a whole detail about how that’s figured out, but this is something that plan sponsors are struggling a bit with. We’re aware of that, and we’re fielding questions on that.
Also, we talked about plan termination. There’s additional guidance coming, and Cheryl’s going to have just a couple minutes after I get done speaking to talk about that. Also, Cheryl had mentioned these contract exchanges and orphan contracts. I will refer everyone on the phone if you’re having questions about that to Revenue Procedure 2007-71. We lay out what the rules are for that.
Basically, as Cheryl said, if you’re an old pre-2005 contract with a vendor that’s no longer approved for use with the plan and with the employer, you’re not going to have to worry about that contract going forward. If you’re one of these contracts for a current employee that no longer is receiving a contribution and had stopped receiving contributions somewhere between 2005 and the end of 2008, again, that’s one where going forward you don’t have to include it in the plan either as long as you’ve made certain efforts to share information with those discontinued vendors. Again, that information is in Rev. Proc. 2007-71.
Again, an item that Cheryl had mentioned is the information sharing agreement and there’s been some real confusion about who needs to have an information sharing agreement and who does the employer/plan sponsor have to have an ISA with. If you’re an existing vendor and you have an existing relationship, an ongoing relationship with the employer, you’re active; you don’t need a separate document for that. You’re going to be sharing information with the employer throughout the course of the provided service. Cheryl wants to say something.
C. Press: With respect to information sharing agreements, really, there are very limited circumstances as Jason pointed out, but if the industry has gone ahead in using an additional, that’s fine. It’s just not required by the regulation.
J. Levine: We don’t want to stop you from going an extra yard if you’ve already done so, absolutely. I won't say any more about that. If you go to the next slide, these will be helpful for you because these cover really the items that Cheryl had covered in significant detail in her presentation, but this gives you really a skeletal view of really what you need to have as essential elements in your plan and then what the optional elements are in the next couple of slides.
Very quickly, I have a slide in here that talks about what’s the effect if there’s a failure to follow the plan document or there’s a failure to operate in conformance with 403(b). Some of these failures, like if you fail to follow the universal availability rule, have a plan-wide effect. Other ones, basically if you just fail for one particular contract, if you don’t follow the contribution limits, that’s only really going to affect the contract and the contract for that participant. It’s not going to affect the plan as a whole. These are laid out I think pretty clearly in the regulation, so I would just refer everyone to familiarize themselves with that if they have any questions or, of course, to contact us in one of the various ways we’ve mentioned.
Finally, just a couple of really quick hits that I want to hit on before I pass it back to Cheryl. I put in a couple slides here about the controlled group rules. I just wanted to make everyone aware again that exempt organization controlled group rules new regs were issued in conjunction with the 403(b) regs. These essentially codify what was pretty much existing law at that point, but again, this is something that a lot of the 501(c)(3) community on the line are going to want to familiarize themselves with if they already haven’t. These could have some impact on your 403(b) operation with respect to nondiscrimination, contribution limits, severance from employment, things of that nature.
The last item is we have a screen shot of our Web page just letting you know that that it will be updated in conjunction with the release of the final Rev. Proc. that lays out the preapproved program, and that will have hopefully a lot of information on the preapproved program. Finally, we’re looking at putting out potentially a special issue of Employee Plans News that covers just the preapproved program when it comes out. With that I’ll hand it back to Cheryl to talk about some upcoming guidance.
C. Press: I think we’ve kind of gone over most of it, but I’ll just go over it again quickly. First is we are updating EPCRS which is kind of the sub-correction kind of based program that we have here based on the changes that were made under 403(b). It obviously, as Jason said, … the written plan requirement, but it’s not limited to that, wherever there was like new requirements or new stuff under 403(b) reg.
Plan termination, we’re currently working on that as well. Each … well, I want to terminate the plan. I have both annuity contracts and custodial accounts, and the annuity contracts are not such a problem because I can kind of give those to the individual and they can maintain their tax exempt character, but the people in the custodial camp don’t want to leave. Can I ever terminate? We’re looking to address those issues. A broader issue basically, a lot of the questions we’ve received, I think we’re going to have some really good answers for you when those come out.
You already heard about the 403(b) rev proc for prototype plans, should be this summer. We’re issuing 81-100 guidance. That’s the group trust rule, and we’re extending that to cover the situations where your 403(b) asset can be mixed in your government, in particular with your 457, your 401(a), and your IRA. It’s a lot easier to administer and more cheap. Then 457(f), that’s the ineligible rule. That’s all your stuff that isn’t eligible. That will cover not only what is a substantial risk of forfeiture so that you can’t defer, but also under 457(e)(11)(d) what is the severance pay plan.
They’re going to be pretty broad. I think I’ve already said they’re substantially complete. We’re just trying to get them through the clearance process which in government time can take awhile given all our other guidance burdens that have come upon us recently with healthcare and whatnot.
I guess that’s what you have to look forward to. I don’t know what else we could do. I hope that after we’re done with all this 403(b) guidance we can just stop doing 403(b) guidance for awhile and turn our attention to other things that are on the guidance plan.
I think one area that will be very helpful and close the loop will be with respect to all the nonqualified stuff because there’s a lot of misinformation out there, particularly since the nonqualified rules under 49 cap A have come out, but the additional nonqualified rules that affect government and tax exempts under 457(f) are not yet out. We do have a notice that’s out if you think you might have a plan. You’re a tax exempt government and you have some sort of deferred comp plan, sick and vacation plan, severance plan, it’s noted 2007-62. Embarrassing it’s three years later, but we have been working hard, and the regs are going to be pretty thorough. I think with that we’re done.