Last month, my blogging buddy, attorney Bob Toth, and I started the 403(b) Crunch Time Series to help 403(b) plan sponsors get ready for the January 1, 2009 effective date for the IRS final 403(b) regulations. We had intended to have the series run until year end, but only got to #6 before the IRS last Friday issued IRS Notice 2009-3 (see Plop plop, fizz fizz, oh what a 403(b) relief it is: IRS Notice 2009-3).

The clock starts ticking again, but 403(b) plan sponsors aren’t home free. While the plan document requirement has been extended to December 31, 2009, plan sponsors must be mindful that

  1. The 403(b) plan sponsor must have a written plan document retroactive to January 1, 2009;
  2. During 2009, the plan sponsor mus operate the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the final regulations; and
  3. Before the end of 2009, the plan sponsor must make its best efforts to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written Section 403(b) plan, with such correction to be based on the general principles of correction set forth in the IRS’ Employee Plans Compliance Resolution System (EPCRS).

Here’s Bob’s take on what “relief” really means.

The relief is very welcome, but advisors and employers need to know what it REALLY means. It DOES NOT mean there is a delay in the compliance rules, it merely delays the requirement that a plan document be signed by January 1. When you think about it, the plan document was the most manageable of the new 403(b) risks that the employers were facing. This does not delay the requirement that the employer monitor contribution limits, loans and distributions. It only means that the plan document outlining all of this doesn’t have to be in place until the end of next year. It buys time to do that in a sane way.

Probably the biggest relief is the ability to use a “reasonable interpretation of 403(b) taking into account of the regulations.” I read this as meaning that you have the ability to figure out a reasonable answer to the tough technical questions for which we have few answers, based upon the statute itself-using the regs as a guideline. This will help immensely when trying to figure out what contracts will be “grandfathered” and in determining what a distribution will be when terminating a plan.

All in all, a very helpful act by the IRS which helps provide a way through some of the ambiguity created by the regs and various other pronouncements by the IRS.

 But what happens if 403(b) plan sponsors don’t meet the requirements of the regulations. Then there’s the above-mentioned IRS’ Employee Plans Compliance Resolution System (EPCRS) which allows plan sponsors to correct certain errors in employee retirement plans, in some cases without having to notify the IRS. The advantage to correcting retirement plans in this way is, or course, to allows participants to continue receiving tax-favored retirement benefits and protects the retirement benefits of employees and retirees.

There are three levels of correction programs in EPCRS:

  1. The Self-Correction Program (SCP) permits a plan sponsor to correct insignificant operational failures in plans such as qualified plans, 403(b) plans, SEPs or SIMPLE IRA plans without having to notify the IRS and without paying any fee or sanction. In many instances, a plan sponsor may correct significant operational failures without notifying the IRS and without paying a fee or sanction.
  2. The Voluntary Correction Program (VCP) allows a plan sponsor, at any time before an audit, to pay a limited fee and receive the IRS’s approval for a correction of a qualified plan, a 403(b) plan, SEP or SIMPLE IRA plan.
  3. The Audit Closing Agreement Program (Audit CAP) allows a sponsor to correct a failure or an error that has been identified on audit and pay a sanction based on the nature, extent and severity of the failure being corrected.

EPCRS was recently updated and expanded in Revenue Procedure 2008-50. The IRS continues to make it easier to use so that more plan sponsors will make submissions under EPCRS instead of waiting for an IRS audit to discover plan failures. and with no disrespect intended, 403(b) plan sponsors will get to know EPCRS better.

Here’s a link to the entire 179 page PDF version of Revenue Procedure 2008-50.