In what seems like a lifetime ago, the IRS provided eligible plan sponsors until December 31, 2009 to adopt a written plan under which they would maintain their existing Section 403(b) arrangements. A 403(b) plan is a tax-favored retirement plan for employees of qualifying public schools and non-profits (among other qualifying entities). The written plan document contains all of the plan’s terms and conditions for eligibility, benefits, distributions, etc. Sponsors who failed to adopt a written plan document by the December 31, 2009 deadline risk subjecting their employees to immediate taxation on retirement amounts being held in the plan, should the IRS discover the failure. Fortunately, at the end of last year, the IRS announced that it would allow 403(b) plan sponsors who missed the December 31, 2009 deadline to correct this failure through its Voluntary Correction Program.
Under the Program, plan sponsors notify the IRS of a late written plan adoption and pay a compliance fee. In exchange, the IRS will consider the written plan document as timely adopted and the plan retains its tax-favored status. Typically, the compliance fee ranges from $750 for a plan with 20 or fewer participants to $25,000 for a plan with over 10,000 participants. However, that fee is cut in half for late adoption corrections submitted by December 31, 2013. To streamline and simplify the correction process, the IRS has provided plan sponsors with a submission kit that provides a detailed roadmap for completing the Program’s application.
403(b) plan sponsors who have not yet adopted a written plan document should take this opportunity to do so and obtain the IRS’s blessing that the plan document was timely adopted. Besides the compliance fee cost savings, doing so nowwill allow the plan to avoid potentially costly tax consequences and will be a first step toward satisfying the requirements applicable to 403(b) plans.