The IRS has had a determination letter process for qualified plans under Code section 401(a), like 401(k) and other defined contribution plans, for many years. A favorable IRS determination letter would give the sponsoring employer a level of comfort that, at least as to form, the plan document was up-to-date and in compliance with relevant Code and IRS regulatory requirements. Quite frequently, auditors reviewing the plan sponsor’s corporate financials, as well as potential deal partners, ask for a copy of the plan’s most recent favorable determination letter from the IRS to get comfort as to the 401(a) plan’s tax-qualified status. However, a similar procedure has not historically existed for 403(b) plans. Over the last several years, the IRS has been working to give employers sponsoring 403(b) plans the opportunity to obtain a level of official comfort as to documentary compliance that is similar to that enjoyed by the company sponsors of 401(a) plans.
In 2013, the IRS established a pre-approved plan document program for 403(b) plans, which authorized eligible providers to submit prototype and volume submitter 403(b) plans to the IRS for review and approval. Once approved by the IRS, the master sponsor could allow individual employers to adopt the prototype document (if they wanted to adopt a plan “as is”) or the volume submitter document (if they wanted to select among certain options that the IRS had approved). An employer who adopted such a pre-approved 403(b) plan document, could rely on the IRS’ favorable opinion letter to the master sponsor as to the form plan document’s compliance with IRS rules. There were certain items, such as compliance with Code section 415 contribution limits and whether the plan was subject to ERISA, which the IRS opinion letter did not cover and upon which the adopting employer could not rely on for that purpose. This process gave most 403(b) plan employer sponsors comfort as to documentary compliance so long as they used one of the pre-approved documents. However, employers that had individually designed 403(b) plans and were not using one of the pre-approved documents, were not able to get a favorable determination letter from the IRS like those issued to employer’s sponsoring 401(a) plans. The IRS has now changed this with a new Revenue Procedure 2022-40, which allows employer’s sponsoring individually designed 403(b) plans to submit their plan document to the IRS for review and the issuance of a favorable determination letter.
The new program is limited, similar to the determination letter program for 401(a) plans, to (i) an initial determination letter for new 403(b) plans (and for long-standing 403(b) plans that could not previously apply for a determination letter) and (ii) terminating 403(b) plans. For ongoing individually designed 403(b) plans that have never been able to apply for a favorable determination letter, and whose employer sponsor would now like to apply for and receive an initial favorable determination letter, there is a staggered eligibility period based on the final digit in the sponsoring employer’s EIN. Those employers whose EIN ends in one, two or three will be allowed to submit their individually designed 403(b) plan document for an initial determination letter on or after June 1, 2023; those whose EIN ends in four, five, six or seven may file on or after June 1, 2024, and those sponsoring employers whose EIN ends in eight, nine or zero may file on or after June 1, 2025. Employers who currently sponsor 403(b) plans should review their current plan documents to determine if filing for a determination letter from the IRS is now allowed under these new rules and if it is advisable for the plan.
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