The Internal Revenue Service (IRS) has begun accepting determination letter applications for individually designed 403(b) plans. An individually designed 403(b) plan is generally one that is not maintained through a prototype or volume submitter document. Plans that have been drafted for a specific plan sponsor or plans that can no longer rely on a prototype or volume submitter opinion letter are likely individually designed plans. This marks an expansion of the IRS program, which allows plan sponsors to request that IRS review their plan and provide confirmation in the form of a determination letter that their plan document meets the Tax Code’s formal plan document requirements.
Historically, the IRS routinely reviewed qualified retirement plan documents and advised plan sponsors on required compliance changes. But that program has never been extended to individually designed 403(b) plans. This means that even though 403(b) plans have been required to maintain a written plan document since 2009, most individually designed 403(b) plans have never been able to request review by the IRS. The IRS will now provide 403(b) plan sponsors the opportunity to submit their individually designed 403(b) plans to the IRS for review and receive a determination letter on plan documents compliance with certain legal requirements. This means that any individually designed 403(b) plan that has not received a past determination letter – which will include almost all individually designed plans – may apply for one.
Along with providing comfort that a plan meets all of the Tax Code’s requirements that the IRS has taken into account as of the date the determination letter is issued, a determination letter can be particularly valuable when dealing with third parties, such as government auditors, annual auditors and potential corporate merger partners.
The IRS will accept determination letter applications for initial review in three waves:
All employers who sponsor individually designed 403(b) plans may also apply any time on or after June 1, 2023, for a determination letter on the plan’s termination. This includes plans that terminated prior to June 1, 2023, but an application must be submitted no later than one year after the plan’s termination date or the date on which the action terminating the plan was taken, whichever is later. In any event, if assets have been fully distributed from a terminating plan, the application must be filed within 12 months of the distribution.
The IRS determination letter program currently permits sponsors of individually designed qualified retirement plans (such as defined benefit plans, defined contribution plans, and 401(k) plans) to submit a determination letter application following certain plan mergers related to corporate transactions. The IRS has not extended the same opportunity to 403(b) plans. But the IRS has suggested that it may provide future guidance expanding the availability of the 403(b) determination letter program in this regard.
The IRS provides some guidance on uncommon situations where a plan may or may not be eligible to apply for initial qualification, including examples demonstrating when plans are considered to have previously applied for a determination letter. For example, a plan that previously received a determination letter from the IRS following review of modifications to a pre-approved plan document would not be precluded from applying for an initial determination letter under the new determination letter program.
Plan sponsors of individually designed 403(b) plans are encouraged to consider applying for a determination letter. Plan sponsors who will be eligible to submit applications this year should begin working with employee benefits counsel to:
- Review plan documents and amend them as needed
- Restate the plan document to incorporate all amendments
- Assemble the documents and information needed for the application
- Prepare required participant notices