K-12 Update: Deadline for 403(b) Plan Corrections Drawing Near

Schools that sponsor 403(b) retirement plans for their employees have limited time remaining to restate their plans to comply with current law. The Internal Revenue Service (IRS) first required schools to adopt written plan documents for their 403(b) plans—and operate the plans consistent with those written plan documents—effective January 1, 2009. This was a significant change from past practices for many schools.

Partially in recognition that it had issued very little guidance on how to comply with the plan document requirement, the IRS issued Revenue Procedure 2017-18 permitting schools to restate their 403(b) plans retroactive to as early as January 1, 2010 (or, if later, the date the 403(b) plan was adopted) to self-correct errors in the written plan document. However, to take advantage of this opportunity, 403(b) plans must be restated by no later than March 31, 2020. Schools that have not yet taken action to review and, if necessary, amend or restate their 403(b) plans should take immediate action to do so in order to protect plan participants against adverse tax consequences.

Revenue Procedure 2017-18 permits schools to retroactively self-correct 403(b) plan document failures. Under this guidance, schools sponsoring 403(b) plans have until March 31, 2020 to "clean-up" any plan document failures retroactive to as early as January 1, 2010 (or, if later, the date the 403(b) plan was adopted). Both because of the lack of IRS guidance since written 403(b) plan documents were first required in 2009, and because schools did not generally have any experience with amending plan documents for changes in operation and the law, many plan documents have needed correction. Even if the plan document itself is compliant as written, many schools have found they failed to timely adopt one or more amendments that were legally required to all 403(b) plans since 2010.

Schools that determine that their 403(b) plan documents are not compliant as written can take advantage of this IRS correction period by taking one of the following two actions prior to March 31, 2020:
 

• Schools can restate their 403(b) plan onto an IRS pre-approved plan document available through a vendor or other third party. Schools that adopt an IRS pre-approved plan to meet the written plan document requirement will generally have assurance that the written form of the plan meets the requirements under Code Section 403(b) and the final regulations. This is because the IRS has already approved the plan document and so long as the school does not make changes to the plan document, it can rely on that IRS approval. 

 

• Schools can amend or restate their current 403(b) plan document. Some schools may only need to adopt a simple amendment to their existing 403(b) plan to correct a plan document failure. Other schools may prefer to restate a plan document that has been specifically drafted for their needs rather than to adopt a standardized document. Still other schools may find that due to the complexity of their plan design, an IRS pre-approved plan document does not provide sufficient flexibility. For these or other reasons, a school may choose to correct by amending or restating its current plan document.

 
However a school chooses to proceed, it is critical that the plan document and the plan's actual operation are consistent with one another and with the Internal Revenue Code. It is also very important to ensure the terms of the restated 403(b) plan accurately reflect the terms of the collective bargaining agreements, administrator contracts, handbooks, or other employee agreements. This is the time to ensure your school's plan is compliant both in written form and in actual operation, particularly in light of increased IRS audit activity of 403(b) plans.
 
Any school that has yet not reviewed its 403(b) plan to determine if amendments are needed should take immediate action. Schools that miss the March 31, 2020, self-correction deadline for their 403(b) plans will generally only be able to correct past plan document failures by filing the plan with the IRS and paying a fee.  
 
For more information, contact Tara Schulstad Sciscoe, Chris Sears, Raven Merlau, Shalina Schaefer or the Ice Miller Employee Benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.