Qualified Retirement Plans
Section 403(b) plans are joining the mainstream of tax-qualified retirement plans. A Section 403(b) plan (sometimes called a tax-sheltered annuity or TSA) is a retirement plan that may be offered by tax-exempt organizations exempt under Internal Revenue Code (Code) Section 501(c) (3) and public schools. Many tax-exempt hospitals and other charitable organizations offer a Section 403(b) plan as their primary retirement program.
Final regulations under Code Section 403(b) (2007 regulations) were published on July 26, 2007 (72 Fed. Reg. 41128), and comprehensively updated prior Section 403(b) regulations. According to the main author of the regulations, IRS Tax Specialist Robert J. Architect, the 2007 regulations are intended to make Section 403(b) plans resemble and operate in the same manner as Section 401(k) plans, to the maximum possible extent. The updated Section 403(b) regulations are generally effective January 1, 2009.
Under the 2007 regulations, Section 403(b) plan sponsors are required to maintain a written plan document and were supposed to have their plan documents in place effective January 1, 2009. That did not turn out to be feasible for many Section 403(b) plan sponsors. IRS Notice 2009-3, 2009-2 I.R.B. 250, issued in late 2008, provided, in part, that the IRS will not treat a Section 403(b) plan as failing to satisfy the requirements of Section 403(b) and the 2007 regulations during the 2009 calendar year if certain conditions are met. One condition is that by no later than December 31, 2009, the plan sponsor has adopted a written plan that is intended to satisfy the Section 403(b) requirements (including the 2007 regulations) effective as of January 1, 2009.
The IRS announced that it will establish the Employee Plans Section 403(b) Prototype Plan Program. (IRS Announcement 2009-34, April 15, 2009) The Section 403(b) Prototype Plan Program will operate generally in the same manner as the current Master and Prototype Program for plans qualified under Code Section 401(a). A Section 403(b) Prototype Plan sponsor will submit a Section 403(b) plan document to the IRS for review. If the plan satisfies the requirements of Code Section 403(b), then the IRS will issue a favorable opinion letter with respect to the plan document. The sponsor may then offer the preapproved plan document for adoption by employers. Comments are due on the proposed program by June 1, 2009. It is expected that the program will be in place later in 2009. The IRS has previously advised (IRS Notice 2009-3) that it will provide for the retroactive remedial amendment of Section 403(b) plans.
Draft Section 403(b) Prototype Plan sample language for use in the new program also was posted on the IRS Web site. This language, when finalized, will be referred to as the Listing of Required Modifications (LRMs) for Section 403(b) Prototype Plans. The language also is adaptable for use in individually designed Section 403(b) plans.
The IRS also indicated that it intends to establish a determination letter program for Section 403(b) plans at a later date that would allow eligible employers to obtain determination letters for individually designed Section 403(b) plans.
Section 403(b) plan sponsors should focus on their plans now so that applicable compliance deadlines may be met.
The GAO released a survey report on corporate pension plans that confirms significant trends and concludes that “it might be time to consider alternative pension models.” (GAO-09-291, March 30, 2009) The survey of 44 corporate plan sponsors was conducted between December 17, 2007 and October 31, 2008, but collected most of its data before the current economic crisis deepened last fall. Here are a few highlights of the survey:
The GAO also noted that approximately 50 percent of the workforce was covered by the private pension system and that the number of single-employer defined benefit plans had declined to fewer than 29,000.
Online guidance regarding the COBRA premium subsidy enacted as part of the ARRA continues to expand. As noted in the March 2009 Employee Benefits Newsletter, the United States Department of Labor (DOL) COBRA subsidy Web site (http://www.dol.gov/ebsa/COBRA.html) is frequently updated with additional guidance.
The COBRA subsidy guidance on the IRS Web site has recently been expanded to include additional questions and answers on administration and eligibility, form preparation, reporting and documentation, and taxability and recapture.
The DOL also has requested public comment on the application forms that individuals will use for requests to review denial of COBRA premium assistance. The expected final release date for these forms is May 15, 2009.
The IRS advised in a private letter ruling that employees will not be in constructive receipt of income due solely to the availability of a one-time irrevocable election to waive retiree health benefits in return for an increased rate of pay for future services. (PLR 200914018) Under an agreement between an employer and the representative of some of its employees, certain employees were allowed to make a one-time irrevocable election to waive retirement health insurance in exchange for a higher rate of pay. Current employees have a limited period of time to make the election, and future employees must make the election within the first 15 days after employment begins. Employees who do not make a timely election have no further opportunity to do so.
The employer’s concern was that electing employees could be found to have constructively received taxable income as the result of making the election because of the obligation of the employer to provide a higher rate of pay in the future. The IRS concluded that this was not constructive receipt of income. Although its reasons were not set out in detail, the basis for the private ruling by the IRS appears to be that the control by the employee of the receipt of the future pay, including the increased amount, remained subject to substantial limitations or restrictions at the time the election was made (including, presumably, the need to remain employed.
Code Section 409A compliance is an ongoing effort. So much effort was devoted to meeting the written documentation requirements of Code Section 409A by the December 31, 2008 deadline that sponsors of nonqualified deferred compensation plans may be inclined to put Code Section 409A compliance on the back shelf for a while. This is a reminder that complying with the operational requirements of Code Section 409A requires ongoing vigilance. The main operational requirements of Code Section 409A include:
Questions to ask to promote compliance with Code Section 409A operational requirements include:
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.
Legal News is part of our ongoing commitment to providing legal insight to our employee benefits clients and colleagues. If you have any questions about or would like to discuss these topics further, please contact your Foley attorney or any of the following individuals:
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