403(b) plans have come a long way since added to the Internal Revenue Code in 1958. The Internal Revenue Service (“IRS”) issued regulations governing the plans in 1964, and published a comprehensive revision that was effective January 1, 2009 that made major changes to 403(b) plans.
The effect of which was to lessen the difference with 401(k) plans.
What Are the New Requirements
Those changes included:
- Requirement for a Plan Document. Plan sponsors had to have a signed document in place by January 1, 2009.
- Non-Discrimination Rules. 403(b) plans must be made “universally available” to all eligible employees.
- Contribution Limits. Plan sponsors are responsible for the compliance of 403(b) contributions with the Internal Revenue Code including the correction of excess amount contributed.
- Timing of Contributions. Plan sponsors must deposit contributions to plan providers within a “reasonable period” of time.
- Transfers to Other 403(b) Contracts. New rules affect participants’ moving their assets to other 403(b) annuities or 403(b) custodial accounts.
- Plan Termination. The new rules permit 403(b) plan sponsors to terminate their plan and distribute the assets under specified conditions.
What Common Mistakes Are Made
With 403(b) plans now look similar to 401(k) plans, the mistakes that plan sponsors are making are, not surprisingly, also similar. Here are the mistakes the IRS sees most often on 403(b) examinations:
- The employer wasn’t eligible in the first place to sponsor a 403(b) plan.
- A written plan documents intended to satisfy the new rules was not adopted by December 31, 2009.
- The terms of the 403(b) written plan document weren’t followed.
- All eligible employees weren’t given the opportunity to make a salary deferral.
- The 403(b) plan didn’t limit the total employer and employee contributions to not exceed IRS limits.
- The catch-up provisions were not administered properly.
- Loan amounts were not limited, and repayment provisions were not enforced.
- There wasn’t documentation that hardship distributions met the IRS requirements.
How Mistakes Can Be Fixed
Fortunately, mistakes can be fixed and avoid the consequences of disqualification through the IRS Employee Plans Compliance Resolution System (“EPCRS”). There are three ways to correct mistakes under EPCRS:
- Self-Correction Program (SCP) permits a plan sponsor to correct certain plan mistakes without contacting the IRS or paying any fee.
- Voluntary Correction Program (VCP) permits a plan sponsor to, any time before audit, pay a fee and receive IRS approval for correction of plan failures.
- Audit Closing Agreement Program (Audit CAP) permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.
There are some special rules that apply to 403(b) depending on whether the mistake was made before or after the January 1, 2009 effective date of the IRS final regulation.
The Takeaways
Two very basic ones.
First, mistakes can usually be avoided with a governance process that monitors the plan on a regular basis.
Second, if mistakes are found, it’s better to fix them voluntarily than to be found on an IRS audit.
