Tax-Qualified and 403(b) Retirement Plans—Important Document Compliance Issues for Employers

Over the past several months, the IRS has made significant changes to the way that retirement plan sponsors assure document compliance.

As we previously reported, effective January 1, 2017, the IRS ended its every five year determination letter program for individually designed tax-qualified retirement plans.

On January 13, 2017, the IRS confirmed that it would not issue determination letters for 403(b) plans, and gave most 403(b) plans until March 31, 2020 to adopt any necessary amendments to correct document defects, retroactive to January 1, 2010.

On June 30, 2017, the IRS made substantial changes to its approval process for pre-approved prototype and volume submitter plans.

The above is all part of an IRS push to move as many plans as possible to pre-approved plans, because the IRS's goal is to move its plan reviewer staff into the plan audit department and significantly expand the number of field audits it conducts each year.

We believe that the IRS’s elimination of the five year program actually provides an opportunity for individually designed tax-qualified retirement plans for a process that is dramatically better than the five year program. And of course 403(b) Plans should aggressively take advantage of the IRS position permitting retroactive document corrections until March 31, 2020.

Because individually designed tax-qualified plans no longer need to be submitted for IRS approval every five years, the elimination of the five year program eliminates one of the costs of maintaining an individually designed plan. Although the determination letter program did result in a regular focus on document compliance, it came with the negatives of an IRS user fee and interaction with the IRS.

And although adopting a pre-approved plan offers advantages in some cases, using an individually designed tax-qualified or 403(b) plan provides greater design flexibility and language clarity. One problem that often arises with pre-approved plans is that the numerous cross-references in, and complexity of, the documents makes operational compliance with the plan document very difficult. Our experience with IRS and DOL audits involving pre-approved plans is that the auditor frequently finds instances of disparity between the plan documents and the operation of the plan. We think this problem will be a continued focus of what we expect will be an increased number of IRS audits.

In a related development, the IRS announced that it will issue guidance at the beginning of every calendar year that lists all of the amendments that must be adopted, and the deadline for adopting the amendments, in order to keep a plan document in compliance with the qualification requirements.

Under this new regime, all qualified plan sponsors must watch for the IRS annual announcements about amendments that must be adopted in the upcoming calendar year, and then actually adopt any required amendments no later than the required deadline.

In addition, we recommend that our clients check-in with us at the beginning of each calendar year to discuss required (or desired optional) amendments.

Alternatively, clients can request that we automatically annually prepare and send to them for adoption any required amendments in all future years.

Please contact us at 410-321-9000 (or if you would like us to convert your pre-approved prototype plan to an individually designed plan or to put your individually designed plan on our automatic annual plan amendment update calendar.