School Corporations with 403(b) Plans: IRS Permits Restatement of Plans to Correct Errors

If your school corporation sponsors a 403(b) plan to which employees can defer their salaries on a tax-deferred basis, there is limited time to restate your plan to comply with current law. Schools were first required to operate their 403(b) plans consistent with written plan documents in 2009, which was a significant change from past practices.

Partially in recognition that it has previously given very little guidance on how to comply with the plan document requirement, the Internal Revenue Service (IRS) has issued guidance permitting employers 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 correct certain errors in the written document. However, to take advantage of this opportunity, 403(b) plans must be restated by no later than March 31, 2020. Schools should start taking action now to amend or restate their 403(b) plans to take advantage of this correction period and to protect plan participants against adverse tax consequences.

The Internal Revenue Service (IRS) issued Revenue Procedure 2017-18 permitting employers, such as public school corporations, 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). Due to the lack of IRS guidance since written 403(b) plan documents were first required beginning January 1, 2009, it is expected that many plans will need correction. Even if the plan document itself is compliant as written, many schools will find they failed to timely adopt one or more amendments that were legally required to all 403(b) plans since 2010. 

Schools 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 who 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 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. The vendor who provides the IRS pre-approved plan document will support that plan document by providing plan amendments and restatements as needed from time to time to keep the plan compliant going forward, so this can be a cost-effective approach over time as well.
• Schools can also amend or restate their individually designed 403(b) plan document. Schools who have more complicated 403(b) plan designs may not be able to adopt an IRS pre-approved plan document, because many terms of a pre-approved plan are "fixed" and employers will only have limited choices available.  Where plan design changes are not possible due to statutory requirements, collective bargaining agreements, plan cost or other concerns, a school will need to amend or restate its individually designed plan.

In either case, 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 actual operation, particularly in light of increased IRS audit activity of 403(b) plans.
 
The time for starting on this process is now. Since amendments can be retroactive to as early as January 1, 2010, a correction could potentially cover a lot of years. Schools may find they need to collect information from 2010 forward as to what amendments have been made to the 403(b) plan and when, as well as to whether operation was consistent with those plan terms. To incent early action, some vendors are charging fees for restatements that increase over time or will only guarantee timely restatements if done well before the March 31, 2020 deadline. Employers should consider starting this process sooner rather than later to minimize the period of correction and to ensure sufficient time to make all required corrections. Schools who miss this self-correction window will only be able to correct plan document failures under the much more costly IRS correction program.
 
For more information, contact Tara Schulstad Sciscoe, Raven Merlau, Austin Anderson, 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.