It has now been a dozen years since the IRS issued Revenue Procedure 2007-71, which was written in response to the logistical difficulties which arose from the mammoth changes imposed by the 2007 changes to the 403(b) regulation. That regulation imposed substantially new responsibilities on 403(b) plan sponsors, including the employer’s need to track and be held accountable for all 403(b) contracts which had ever been issued under that 403(b) plan. Considering that some of these plans have been around since 1919 or so; that many of these plans have permitted a large number of vendors to peddle their individual contracts to their employees; and given that many of the vendors never had any legal relationship with the employers themselves; these regs created a very serious problem.
This problem was exacerbated by the DOL, which revoked its long-standing Form 5500 exemption for 403(b) plans following the new IRS regs. That exemption had permitted ERISA 403(b) plans to merely file what was in effect a “registration statement” (as required by the Tax Code), and did not require an IQPA audit for those plans with 100 or more participants.
So then there were two pretty serious problems. The first was a basic compliance problem: dealing with potentially generations of 403(b) legacy vendors with whom employers had no connection. The second was the Form 5500: how was a financial statement supposed to be put together when the employer never had a clue as to whether some of the contracts even existed, and then all of those past contracts would be counted toward the 100 participant level for audit purposes.
Rev Proc 2007-71 offered a great deal of relief, to which the DOL also (partially) acquiesced-though employers and professionals often seem to have forgotten about it today. Any contract issued before 2005 and to which no contributions were received after December 31, 2004, could be completely ignored for 403(b) compliance purposes. Any contract issued between December 31, 2004 and before January 1, 2009 could also be excluded by for tax compliance purposes, as long as no contributions were received into that contract after December 31, 2008, and the employer made a good faith effort to establish a connection with that vendor.
The DOL agreed to apply that same rule to its Form 5500, including agreeing to exclude those now “exempted” contracts from the participant count for the IQPA audit purposes. The exception: the DOL has stated that those contracts are still subject to ERISA; the exemption only extends to the ERISA reporting requirements. This differs from the IRS approach, which exempts those contracts for all 403(b) tax compliance purposes.
The value of this Rev Proc endures; and is particularly helpful when plans restate their 403(b) plan docs and need to do things like name their vendors; have Information Sharing Agreements; and try to make plan redesign decisions.
I encourage all those who have forgotten about this Rev Proc to pull it out: it may solve many of your plan problems.
The question for the IRS now, as one 403(b) expert raised with me, is whether there really is any value in maintaining the different treatment between the pre-2005 legacy contracts and the 2005-2009 legacy contracts, and whether those 2005-2009 contracts should also enjoy that same broad exemption without any requirement to prove the “good faith effort” of over a decade ago. No funds have gone into these contracts for well past any Tax or ERISA statute of imitation (except, of course for outright fraud), and there may not even be any sponsor staff around anymore which could attest to what “good faith efforts” were undertaken. It would simplify tax administration, and permit plans to no longer waste any time in dealing with these legacy vendors which have no impact on the plan today.