On March 27, 2020, the Internal Revenue Service (the “IRS”) announced a delay of the last day of the remedial amendment period for 403(b) retirement plans from March 31, 2020 to June 30, 2020, providing three additional months for some 403(b) plans to be amended retroactively to comply with certain legal requirements. This is welcome news for many tax-exempt organizations and governmental employers who sponsor these plans. As explained below, these plan sponsors should consider taking advantage of the extended deadline to update their plan documents.
A 403(b) plan is a tax-advantaged retirement vehicle offered by many tax-exempt and governmental employers to provide employees with a way to save for retirement. In 2007, final regulations were issued under Section 403 of the Internal Revenue Code of 1986, as amended (the “Code”). These final regulations required sponsors of 403(b) plans to adopt new written plan documents or amend their existing plan documents to comply with the requirements contained in the regulations, which were generally effective as of January 1, 2009.
Historically, sponsors of 401(k) plans (and certain other types of qualified retirement plans, but not 403(b) plans) have been able to receive assurance that their written plan documents comply with the applicable requirements of the Code. This is because 401(k) plan documents can be submitted to the IRS for review as part of an application for a favorable determination that the plan document complies with the requirements provided in the Code for a plan to be tax-qualified. Conversely, when 403(b) plan sponsors were adopting or amending their plans to comply with the final Treasury regulations, there was no such program in place for 403(b) plans.
In March 2013, the IRS announced new procedures for the issuance of opinion and advisory letters for pre-approved 403(b) plan documents (i.e., prototype and volume submitter plan documents, which are usually obtained by employers from vendors). However, the IRS will not issue determination letters on 403(b) plans that are individually designed for an employer, so only 403(b) plan sponsors that adopt pre-approved documents will be able to rely on a favorable determination from the IRS regarding the form of their plan document.
The Remedial Amendment Period
When the IRS announced the procedures relating to issuing opinion and advisory letters for pre-approved 403(b) plan documents, they also included information about a “remedial amendment period” that would allow plan sponsors to retroactively correct defects in the form of their 403(b) plan documents, provided that the corrections were made prior to the end of the remedial amendment period. For this purpose, a defect is generally a provision, or the absence of a required provision, that causes a plan to fail to satisfy the requirements of Code Section 403(b). The remedial amendment period is available only if an employer had adopted a written plan document intended to satisfy the requirements of Code Section 403(b) on or before January 1, 2010 or, if later, the plan’s effective date.
Note, however, that not every defect in a 403(b) plan can be corrected retroactively during the remedial amendment period. In general, any 403(b) plan that was compliant with the requirements of Code Section 403(b) with respect to the form of the plan document but was not operated consistent with the terms of the plan document may not correct its operational error by amending the plan during the remedial amendment period. Such an error must be corrected by the plan sponsor by using the methodology described in the IRS Employee Plans Compliance Resolution System (“EPCRS”). For example, if a 403(b) plan erroneously failed to include necessary language limiting the amount of contributions that a participant could make each year, but no participant actually exceeded the limit, the 403(b) plan should be retroactively amended by June 30, 2020 to correct this error. However, if the 403(b) plan document contained the appropriate limits, but a participant made contributions in excess of the limits, this would be an operational failure that the plan sponsor must correct using the methodology described under EPCRS.
The Last Day of the Remedial Amendment Period is Now June 30, 2020
Prior to the COVID-19 pandemic, the remedial amendment period for 403(b) plans was scheduled to end on March 31, 2020 with respect to most form defects. However, on March 27, 2020, the IRS announced its intention to issue guidance to delay the deadline until June 30, 2020. This provides sponsors of 403(b) plans with an additional three months to ensure that their 403(b) plan documents are in compliance with Code Section 403(b).
There are limited exceptions for when this remedial amendment period could be later than June 30, 2020. These exceptions relate to certain document defects resulting from recent changes in the law or arising in a recently adopted plan or amendment. In particular, Revenue Procedure 2019-39 provides that for individually designed non-governmental 403(b) plans, the remedial amendment period with respect to changes in Code Section 403(b) requirements ends on the last day of the second calendar year that begins after the issuance of the IRS Required Amendments List on which the required changes appear. For example, the deadline for 403(b) plans to adopt any amendments relating to items on the IRS's 2019 Required Amendments List (such as changes required to be made to plan documents in connection with the final regulations relating to hardship withdrawals) is December 31, 2021. Sponsors of governmental 403(b) plans and non-governmental 403(b) plans that have adopted a pre-approved plan document should consult with their legal counsel regarding how this limited exception may apply to their plan.
Action Items for 403(b) Plan Sponsors
A 403(b) plan sponsor who timely adopted a 403(b) plan document that was intended to comply with the Code will now generally have until June 30, 2020 to retroactively correct certain defects to the form of the document that failed to properly comply with the Code. This can be done either by amending the existing plan document or by adopting a pre-approved plan document. It is important for plan sponsors to recognize that in certain circumstances this amendment may be drafted to be effective retroactively to correct certain plan document failures (potentially all the way back to the later of January 1, 2010 or the plan's effective date), but generally only if the plan sponsor takes action by June 30, 2020.
403(b) plan sponsors should work closely with legal counsel to make sure they take advantage of the remedial amendment period and make any corrections that are necessary.
If you have any questions regarding the content of this alert, please contact Steven Einhorn at firstname.lastname@example.org.
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.