The Internal Revenue Service (IRS) has announced that beginning June 1, 2023, it will accept determination letter applications for individually designed 403(b) retirement plans. As background, 403(b) plans are a distinct type of retirement plan for employees of 501(c)(3) tax-exempt organizations and public schools (including colleges and universities). Despite the formal distinction, though, in many respects modern 403(b) plans often resemble 401(k) plans.
The new 403(b) plan determination letter program will be available to plan sponsors under two different circumstances:
- An initial plan determination (applications will be accepted on a rolling basis, as described below); and
- The termination of an existing plan.
Initial Plan Determinations
The IRS will accept applications for initial determination letters for individually designed 403(b) plans in staggered intervals based on the last digit of the sponsor’s employer identification number (EIN):
Plan Termination Determinations
The IRS will accept determination letter applications for terminating plans beginning June 1, 2023, subject to the following rule: Sponsors of terminating plans must submit an application for a determination letter within one year of the later of (a) the effective date of the plan termination or (b) the actual date formal action is taken to terminate the plan, but in no event more than 12 months after the distribution of substantially all of the terminated plan’s assets.
Benefit of Determination Letters
For employers with individually designed plans, there is a benefit to obtaining an official written determination by the IRS that a plan is designed in compliance with the law. In addition, the determination letter application process can be a useful compliance exercise; if the IRS raises any concerns about particular plan provisions, the agency will typically work with the sponsor to resolve these issues in a non-adversarial manner.
What a Determination Letter Covers
A 403(b) plan determination letter will not address whether the plan is subject to Title I of ERISA. Nor will it address whether the plan meets any requirements that apply due to a plan’s coverage of multiple employers that are not in a single controlled group under section 414(b), (c), (m), or (o). Additionally, a 403(b) plan determination letter, will generally only cover the changes in the plan qualification requirements up through those listed on the IRS’s annual “Required Amendments List” from two years before the determination letter is submitted. Therefore, plan sponsors (including those applying for determination letters) should continue to work with legal counsel to ensure their plans are up-to-date with all current legal requirements.
