Introducing Ice Miller's 403(b) Plan Comply Now Program Introducing Ice Miller's 403(b) Plan Comply Now Program

Introducing Ice Miller's 403(b) Plan Comply Now Program


Sponsors of retirement plans under Section 403(b) of the Internal Revenue Code ("Code") have lived with uncertainty as to the tax-advantaged status of their plans since the Internal Revenue Service ("IRS") issued regulations effective January 1, 2009, requiring a written plan document. Since that date, the IRS has offered little guidance to employers as to how to ensure their written plan documents satisfy the Code requirements in form. The IRS initially stated it intended to adopt a determination letter process for 403(b) plans similar to that available for qualified retirement plans, pursuant to which plan sponsors could secure a letter from the IRS as to the tax-advantaged status of their written plan document. However, the IRS ultimately decided to largely terminate its existing determination letter program rather than expand it, leaving employers without an ongoing mechanism to secure assurance that their 403(b) plan documents comply with the Code requirements in form.

Preapproved Plan Documents

As we have outlined in prior e-bulletins, to address this concern the IRS adopted a preapproved plan program for 403(b) plans. Employers can adopt a preapproved plan document for their 403(b) plans by March 1, 2020, and can rely on the IRS letters preapproving those plans for assurance of tax-advantaged status in form. Most 403(b) plan service providers will offer a preapproved plan document employers contracting with that provider can adopt.

Individually Designed Plan Documents

For a number of reasons, however, not all employers can easily take advantage of a preapproved plan document for their 403(b) plans. Employers adopting preapproved plan documents generally cannot modify those documents but must make their 403(b) plans fit within the terms of the preapproved plan documents. This is not always easy, or even possible, to do.  For example, a 403(b) plan may have multiple benefit formulas or eligibility classifications, unique definitions of compensation, or vesting schedules that cannot be accommodated within the defined parameters of a preapproved plan. While some employers may decide to amend their 403(b) plan designs to fit within the limitations of a preapproved plan document, other employers may not want to do so—for example, if the amendment would change the fundamental nature of the plan design or face resistance by internal constituencies—or not be able to do so— for example, due to state statute dictates, budget considerations, or collective bargaining agreements.

Tax-advantaged status of a 403(b) plan is essential for a number of reasons.  Contributions and earnings to tax-advantaged plans avoid taxation until they are distributed to plan participants. Employees can make pre-tax contributions to 403(b) plans and tax-free rollover distributions to individual retirement accounts and other retirement plans. This makes tax-advantaged plan status very attractive to employers and employees both.

Without a determination letter program or a preapproved plan document available, 403(b) plan sponsors will face ongoing uncertainty and risk related to the legal compliance of their plan documents. Ice Miller's 403(b) Plan Comply Now Program ("Comply Now") is designed to address that uncertainty and risk.

Comply Now Plan Document

Ice Miller's Comply Now Plan Document provides the assurance plan sponsors need for their ongoing plan document compliance concerns. Comply Now is available for all individually-designed 403(b) plans and may be used by tax-exempt employers, including church employers and governmental employers, to provide protection in the event of IRS audits and participant disputes and to help avoid costly corrections.

Under Comply Now Plan Document, Ice Miller will identify any required amendments that need to be made to a plan sponsor's 403(b) plan for continued tax-advantaged status. If all required amendments are timely made by a plan sponsor, Ice Miller will issue a letter to the plan sponsor that its plan document has been updated to comply with all applicable IRS requirements for tax-advantaged status in form and that any design amendments are consistent with the Code's requirements for 403(b) plans. 

Comply Now Plan Document is available to 403(b) plan sponsors. The fee will be based on whether Ice Miller prepared the current 403(b) plan document and the complexity of the 403(b) plan. 

Comply Now Plan Operation

Operational compliance is also critical for 403(b) plans. Under Ice Miller's Comply Now Plan Operation, Ice Miller will identify important operational guidance issues that may apply to the plan sponsor's 403(b) plan. On plan sponsor request, Ice Miller will conduct focused audits of a 403(b) plan's operations to determine whether common compliance issues are occurring, such as failing to follow a plan's definition of compensation, depositing employee contributions in an untimely manner, failing to comply with contribution limits, or incorrectly reporting loan repayment failures.  

The fee for Comply Now Plan Operation will be based on the complexity of the 403(b) plan, scope of the operational issues that will be reviewed, and availability of plan sponsor internal resources to support the review. In many cases, these services can be provided for a flat fee.

If an operational failure is discovered by the IRS during an audit, the 403(b) plan will be subject to sanctions based on the facts and circumstances of the particular failure or failures.  Factors considered in determining the amount of a sanction include the steps taken by the plan sponsor to prevent failures, the steps taken by the plan sponsor to identify failures that may have occurred, and the extent to which correction of a failure has progressed before the IRS began its examination of the plan Ice Miller's review under Comply Now Plan Operation will not only assist a plan to identify and correct any operational failures but will also be evidence of the plan sponsor's reasonable efforts to comply with the Code in actual plan operation.

Take Steps to Comply Now

While a letter issued under Comply Now is not binding on the IRS, Department of Labor, or other third parties, it will serve a critical role in demonstrating good faith efforts by a plan sponsor to continue to maintain its 403(b) plan's tax-advantaged status in both form and operation.

For more information about Comply Now or to participate in Comply Now, contact your Ice Miller Employee Benefits attorney, or if you do not have a regular Ice Miller benefits attorney, Mary Beth BraitmanTara Sciscoe, Chris Sears, Raven Merlau, or Ann O'Hara.

This publication is intended for general information purposes and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstance. Ice Miller will not provide services under Comply Now unless specifically requested by the reader to do so. The actual terms of any engagement under Comply Now will be set forth in a separate writing.
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