The Internal Revenue Service provided relief to 403(b) plan sponsors today in the form of  Notice 2009-3. The Notice states that the IRS will not treat a 403(b) plan as failing to satisfy the requirements of Section 403(b) and the final regulations during the 2009 calendar year, provided that:

  1. On or before December 31, 2009, the plan sponsor has adopted a written  403(b) plan that is intended to satisfy the requirements of  403(b) (including the final regulations) effective as of January 1, 2009;
  2. During 2009, the plan sponsor operates 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 makes 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).

Sounds all good, right? Not necessarily. Here’s what my blogging buddy, attorney Bob Toth, who has extensive 403(b) experience has to say about it:

Here’s What It Does Do

It looks like it gives us leeway until the end of next year in dealing with some of the more difficult areas of the regs and of Revenue Procedure 2007-71. It may well mean that a plan termination can be effective if it distributes custodial accounts (because that what a reasonable interpretation of 403(b) would allow);

It allows us to adopt a reasonable interpretation of what is a grandfathered contract and what is not, helping us finally to apply some measure of reasonableness to Rev. Proc. 2007-71. We can more easily figure out what contracts plans will be responsible for and what they won’t;

And, on the "dark side", reminds us that this relief is conditioned on operational failures occurring in 2009 being fixed using EPCRS principles by the end of 2009-which can be burdensome.

Here’s What it Doesn’t Do

The Form 5500 rules, complete with auditing requirements do not go away. How will the auditor now test for compliance with the plan document?

The employer STILL has responsibility for making sure that that the compliance rules are complied with. So, all those employers who consolidated because of their responsibilities, made good choices. It was not the plan document requirement which drove their efforts: it was, and still is, the new employer obligations.

I believe the bottom line is that this is helpful, as it relieves employers from the risk of disqualification because of the lack of a plan document. But the plan document risk was really the most manageable risk brought on by these new rules. The most significant risk did not go away-the requirement that the employer be responsible for compliance. It is unlikely that the IRS will view as reasonable (in most instances) a reliance on employee representations for compliance. 

Here’s a link to IRS Notice 2009-3.