403(b) Pre-Approved Plans
By Meredith Whitney, JD, LLM, CISP
What is a 403(b) pre-approved plan?
Similar to the existing IRS program for qualified retirement plans, the IRS established a pre-approved program for 403(b) plans. This program allows document providers of prototype and volume submitter plans to obtain IRS approval of their 403(b) document’s form. Such approval assures any employer that adopts the prototype or volume submitter document that its form complies with Internal Revenue Code Section (IRC Sec.) 403(b).
Although 403(b) plans (with the exception of church plans) have been subject to the written plan document requirement since 2010, the IRS has not previously made available any type of pre-approved 403(b) document program.
What is the benefit of having a pre-approved 403(b) plan?
A pre-approved plan document usually benefits adopting employers because of the reduced costs associated with this type of document and the assurance that it complies with the IRC. Because the document that an employer adopts will be used by various employers, the costs incurred by the document provider in drafting the document, obtaining IRS approval, and preparing any required plan amendments or updates can be spread among the various adopting employers. In contrast, an employer that uses an individually designed document must bear the entire expense associated with drafting the custom plan document, as well any required and/or discretionary amendments.
In addition to the reduced cost associated with drafting and updating a pre-approved plan, an adopting employer of a pre-approved document, upon the plan’s adoption, can rest assured that the document complies with the requirements of the IRC.
Another benefit is that the plan document provider will be responsible for drafting any plan amendments that might be required to maintain the plan’s compliance and notify the adopting employers of such amendments. An individually designed document does not have a plan document provider who is obligated to make the necessary updates to the plan. Thus, adopting a pre-approved plan document will help ensure that the document form remains in compliance with the IRC on an ongoing basis.
Are there any other compliance concerns for a 403(b) plan once a pre-approved plan is adopted?
Approval from the IRS through the pre-approved program does not extend to any investment contracts that are in place with respect to the plan or the overall operation of the plan. Even if a pre-approved plan is adopted, the employer must still ensure that the investment contracts and agreements related to the plan conform to applicable laws and that the plan is operated in accordance with its terms.
Are all existing 403(b) plans required to be restated as a pre-approved plan?
No. A plan is not required to be restated onto a pre-approved plan. However, a plan that is not restated onto a pre-approved document will be considered individually designed. Although it is permissible to use an individually designed plan document, the IRS currently does not intend to have a determination letter program for 403(b) plans. Consequently, an employer will not be able to receive IRS approval of the individually designed plan document.
If restating an existing plan onto a pre-approved plan, is there a deadline?
Yes. The IRS issued the first approval letters in March 2017, announcing that employers have until March 31, 2020, to convert their existing 403(b) plans to a pre-approved document.