When the IRS extended the deadline for meeting the written plan requirement for 403(b) arrangements from January 1 to December 31, 2009 in Notice 2009-3, it did so with some conditions attached. In particular, the IRS is requiring sponsors to operate their plans during 2009 in accordance with a reasonable interpretation of 403(b) and the final regulations.    The Notice also requires 403(b) plans to make its best efforts to correct any operational failure that occurs in 2009 by the end of the year. Therefore, while the Notice was very welcome, relieving some of the pressure caused by the original deadline, it is hardly a one year’s free pass from compliance with the final regulations.

Under the final regulations, one of the biggest challenges for plans with multiple investment providers is to establish procedures so that the venders can effectively share information with the employer and with each other.   Historically, each investment provider in 403(b) plans has operated largely independently, typically with little or no communication between them. Changing this structure to facilitate compliance across investment providers is a significant task that will not happen overnight.   

A number of investment providers, individually and together (most notably, through the SPARK Institute data sharing standards) have made efforts to provide services that try to tackle this issue. (The various information sharing services that are emerging will be discussed in a subsequent post.) But many plans have yet to implement any form of process for exchanging plan information. Even more critical, many plans have also not yet resolved the question of who is ultimately signing off on plan transactions such as loans or hardship withdrawals: the plan administrator, the vendor, or a third party.

Despite the Notice 2009-3 delay and encouraging statements from IRS officials about how the IRS is not “expecting perfection”, plan sponsors should not lapse into complacency in 2009. Now is the time to establish effective compliance programs that integrate information from all the investment providers.