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Some retirement plan practitioners have had to adjust their expectations and business plans since the Internal Revenue Service made it clear in March that federal budget constraints will prevent the agency from issuing determination letters for individually designed Section 403(b) plan documents.
The news from IRS that “limited resources” make it infeasible for the agency to establish a determination letter program for individually designed 403(b) plan documents was unexpected and potentially the most disruptive guidance in a revenue procedure that the agency released March 28, practitioners told BNA in a series of interviews at the end of May.
In a draft version of the revenue procedure released in 2009, IRS had indicated that it would offer a determination letter program for individually designed 403(b) plan documents (70 PBD, 4/15/09; 36 BPR 941, 4/21/09).
In Revenue Procedure 2013-22, which established a preapproved plan document program for Section 403(b) plans, IRS clearly stated that it did not “contemplate the issuance of individual determination letters to sponsors of § 403(b) plans” (61 PBD, 3/29/13; 40 BPR 813, 4/2/13).
The new revenue procedure “will be disruptive because it will move people into preapproved plans that might not have had preapproved plans before,” said Gregory L. Needles, a partner at Morgan Lewis in Washington.
Another practitioner said that a shift to preapproved plan documents might not be feasible for many 403(b) plan sponsors. Individually designed plans generally are a better fit for the tax-exempt 501(c)(3) organizations that sponsor 403(b) plans, said Julie M. Edmond, a partner at Covington & Burling in Washington.
“Nonprofits often have kind of quirky corporate structures and relationships to other entities,” Edmond said. “Their relationships to other entities may shift as board members shift,” she said.
Preapproved plan documents “tend not to have sufficient flexibility to accommodate those kinds of changing relationships,” Edmond said. If many nonprofits decide to use IRS-preapproved 403(b) documents when they become available, she added, “they're going to find at some point that they need to make changes, or want to make changes, and it may not be so easy to do it.”
IRS lessened the impact of its no-determination-letter policy with a provision in the revenue procedure permitting plan sponsors to remedially amend their individually designed 403(b) plan documents, said Robert J. Toth Jr. of the Law Offices of Robert J. Toth Jr. in Fort Wayne, Ind.
“You can still have the remedial amendment period, even if you are an individually designed plan,” Toth said. “And you can still take advantage of EPCRS, even if you don't have a favorable determination letter,” he added, referring to IRS's voluntary correction programs under the Employee Plans Compliance Resolution System.
Hospitals, universities, and churches may face challenges because they tend to have highly customized 403(b) plans, Toth said.
One avenue that practitioners are exploring is whether IRS might issue private letter rulings on 403(b) plan documents, Toth said.
Not having a determination letter program for individually designed 403(b) plans might make the volume-submitter program more attractive to benefit practitioners because it is the most flexible preapproved document program that IRS offers, said Robert M. Richter, vice president for document consulting services at SunGard Relius in Jacksonville, Fla. The volume-submitter program also provides the most “reliance” in terms of IRS approval, he said.
Under the agency's volume-submitter program, employers are permitted to make minor modifications in a volume-submitter plan document and “still have reliance on everything [in the document] but those modifications,” Richter said.
In contrast, when an employer modifies a prototype plan document, generally “the plan becomes an individually designed plan, and you have reliance on nothing,” Richter said.
For that reason, Richter said that he hopes to persuade practitioners that volume-submitter documents are a better choice than prototype documents.
“A volume submitter can look like a prototype. It can be a basic plan document with an adoption agreement and so, from a user perspective, it really doesn't look any different from a prototype,” Richter said.
Richter added that he had hoped that IRS would merge the volume-submitter and prototype document programs into a single preapproved document program for 403(b) plans.
“Coming out of the starting block, they could have taken the best of both worlds, combined it into one program,” Richter said. “They didn't do that and, from my personal perspective, that's the biggest disappointment,” he said.
Needles said his law firm reviews volume-submitter and prototype documents at the request of some clients and, under the new revenue procedure, the firm may draft a volume-submitter document for its clients. “Typically, that's not something we would do,” he said.
However, he added, “we do have several clients that have large multiemployer populations that would benefit from a volume-submitter document. Essentially, they've got that now. It's just a matter of going in and getting it approved by IRS.”
Apart from its position on determination letters, Rev. Proc. 2013-22 offered the 403(b) industry much more than it had expected, especially with respect to church plans and vesting schedules, said Robert Architect, vice president for compliance and market strategy at Variable Annuity Life Insurance Co. in Fairfax, Va.
The final revenue procedure is “more expansive than originally was anticipated,” Architect said. For example, the draft revenue procedure “certainly did not go into the more complex 403(b) church structure[s] known as retirement income accounts, but this does,” he said. “It originally did not anticipate having vesting schedules; this does have vesting schedules,” he added.
Edmond said that the advent of the 403(b) preapproved document program will not require substantial changes in her practice, which is centered on individually designed plan documents. However, the revenue procedure and related sample language that IRS provided and ultimately the documents that IRS approves will contribute positively to practitioners' understanding of the Section 403(b) rules, she said.
“To some extent, the 403(b) rules, until fairly recently, have been somewhat unclear, and even now there's a lot of uncertainty about, for example, plan termination,” Edmond said. “To the extent we get any guidance, whether it's in the form of a prototype document or anything else, it's useful. It adds to our body of collective knowledge,” she said.
In a world without determination letters, there always will be a need for individually designed 403(b) plans, but there will be fewer of them, Needles said. Preapproved plan documents do have some advantages, he added.
“There are some economies of scale [from] putting everything into the same plan document,” Needles said.
“When you're talking about a more complicated plan design, it makes sense to put everything in the same plan document and not be too concerned about the fact that you can't get a determination letter because, at that point, I hope, the employer is dealing with fairly sophisticated counsel who will provide them with a compliant plan document.”
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