The implementation of the IRS’s 403(b) pre-approved plan program by a number of vendors has been delayed by at least one thorny issue which will cause concern for a number of 403(b) plan sponsors. The IRS seems to have technically resolved the issue with its guidance on “effective date addendums,” (see https://www.irs.gov/retirement-plans/pre-approved-403b-plans-effective-date-addendum ). But at least one of the issues it was meant to address has left many plan sponsors with questions of what to do now.
One of the roots of the problem is what the IRS generally refers to as the “once in, always in” rule of 403(b)’s “universal availability” requirement. “Once in, always in” refers to the IRS position that once an employee has become eligible to make elective deferrals into the plan by reaching the 1000-hour benchmark in one year, that employee will remain eligible to make elective deferrals in future years-even in years where that employee does not complete 1000 hours of service. That person can only lose that ability to defer if they become part of one of those limited categories of employees which can be excluded (such as certain students).
Now, this rule is not explicitly stated in the 403(b) regulations, nor is it part of the Code Section 403(b). Though this position has not been widely publicized over the years, the IRS applies it on audit, and the Internal Revenue Manual itself contains this interpretation as well.
It all came to a head in the pre-approved document process. The IRS requires that the “once in, always in” term be included in the pre-approved document. The practical problem that came to the attention of the IRS is that many employers may not have not applied this rule, over time, consistent with the required plan document term. With the pre-approved document covering practices back to January 1, 2010, plans which adopted this the pre-approved plan with this term automatically included term might immediately have a “form and operation” problem which would force them into EPCRS.
This problem is not limited to the “once-in-always-in”rule, as there can be any number of practices required by the pre-approved document which the employers have not “practiced” since January 1, 2010. The “effective date addendum” addresses this “automatic” form and operation problem, though it will really serve to complicate plan 403(b) plan documents even further. Why I say “even further” is because 403(b)plan documents are complex beasts to begin with. For example, they incorporate by reference the underlying annuity contracts and custodial agreements as plan terms. A number of us have raised the issue that there are going to be inevitable conflicts between the central plan document and those (often complex) underlying contracts, and the IRS’s position that the centralized plan document must control in the event of such conflicts may not always be tenable.
The “effective date rule” does address the technical issue of adopting terms which were not applicable back to January 1, 2010. What plan sponsors need to be aware of, though, is the need to implement the once in, always in rule going forward. But it does not address the elephant in the room: what happens to the employer which did not use that rule back to January 1, 2010, and admits in their plan document that they didn’t?