The IRS has announced the end of the first remedial amendment period for 403(b) plan documents, in Revenue Procedure 2017-18.  The last day of that RAP will be March 31, 2020. Now what do you do with it?

Well, 403(b) plan documents are very curious things, as are their Remedial Amendment Periods. A written document was first required by the 2007 403(b) regulations as a condition of maintaining their favored tax status, now nearly 100 years after 403(b) plans were first put into play.  The tax statutes enabling 403(b) plans and their predecessors never required written documents other than the annuity contract or the custodial agreement. Unlike 401(a), with its extensive scheme of rules of what a plan document must contain, there has historically been nothing of the sort in 403(b).

This has been a dramatic change.  Considering there have been generations of administrators and vendor staffs which have used a variety of different methods to operate 403(b) plans, this change was bound to be a difficult one. And it has been.  The IRS exacerbated this challenge for themselves and 403(b) plan sponsors and vendors with this 2007 regulation by not publishing any  significant guidance until 6 years later. And then that guidance was only to  what terms would be required of a pre-approved plan-while announcing that ONLY pre-approved plans would be able to get a favorable Determination Letter. There are no, and it doesn’t appear there will ever be,  standards for what terms may be acceptable other than those for prototypes or volume submitter documents.

A bigger challenge for the IRS, however, is that the plan document requirement is a creature of regulations, not of the Tax Code itself. This means there is no statutory rule which lays out the time frame under which 403(b) plan documents have to be amended to meet the requirements of law changes-unlike the 401(b) remedial amendment period for 401(a) amendments (401(b) does not apply to 403(b) plans). The IRS will have to create a 403(b) Remedial Amendment Period for each and every  required plan amendment whenever there is any law or regulation change.

This is all further complicated by  the 10 year period which has passed since the 2007 regulation in which vendors and employers have written 403(b) plan documents based upon their “best guesses” of what should be in a compliant plan document. The IRS decided to handle this “best guess” period by announcing that any 403(b) document could be corrected under a new, special 403(b) Remedial Amendment Program, by that new RAP’s end date. It announced that the beginning of the RAP was the required adoption date for 403(b) plan documents (generally, January 1, 2010). The end of the RAP would be announced once the IRS approves its first set of pre-approved 403(b) documents. Once those first pre-approved documents are released, the IRS promised to announce the “end date.” It has now done that, with Rev Proc 2017-18 announcement of March 31, 2020 as the end of the RAP-which also suggests that the pre-approved documents will be released by that date.

So, as a practical matter, now what? The following summarizes what to do:

  • 403(b) written plan documents needed to be adopted by January 1, 2010 (thought there are a number of caveats to this-including when to use the “paper clip” approach to demonstrate a timely adoption).
  • If you did not adopt a written document by that date, you will need to correct with a Voluntary Compliance Program filing for a failure to timely adopt a 403(b) Plan. You cannot use this new Remedial Amendment Period to correct a late-adopter plan.
  • If you timely adopted a plan document (or adopted a new one since January 1, 2010), the terms of that document are unlikely to comply with what we think the rules are, given what we have found through the pre-approval process (remember, the IRS is still not giving us the rules for 403(b) plans, just for the pre-approved plans). This means you have one of two  choices:
    • You can restate your current plan to a vendor’s pre-approved plan by March 31, 2020, and your plan will be protected back to January 1, 2010 (remember, there is no need to goo back further, as plan documents were not a tax rule before then).
    • You can amend your plan to an individually designed plan with the terms you think meet the IRS’s non-published requirements, but you’ll never be able to have a favorable determination letter to protect you. One alternative is to adopt a volume submitter document, where you WILL have effective reliance on the plan terms that you do not alter, and only “go naked” on  those terms which are important to the sponsor but which may not be contained in the volume submitter document.

A cautionary note: a number of plan document problems which occurred in the 2008-2010 rush to complete documents may not be able to be fixed under this program. Thought the RAP is useful, it is not nirvana.