Guest Article

(From the March 3, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Model 403(b) Plan and Guidance on Complying with Final 403(b) Regulations

IRS issued model plan language for use by public schools in adopting a written plan, or in amending an existing plan, to comply with the final regulations under IRC § 403(b). The adoption by a public school employer of the model language on a word-for-word basis, or using language that is substantially similar in all material respects, will be treated as meeting the requirements of IRC § 403(b). IRS Revenue Procedure 2007-71.

Copies of Rev. Proc. 2007-71, including the model plan language, can be downloaded from the IRS's Web site at www.irs.gov/pub/irs-drop/rp-07-71.pdf.

Background

Section 403(b) applies to contributions made for employees who perform services for a public school of a State or local government or for employees of tax-exempt employers, or to contributions made for certain ministers. Final regulations under IRC § 403(b) were published in July 2007 to replace existing regulations, to reflect numerous amendments made to IRC § 403(b) over the past several decades, and to provide comprehensive guidance relating to IRC § 403(b), including the requirement that Section 403(b) contracts must be maintained pursuant to a written plan. The 2007 regulations are generally effective for plan years beginning after 2008.

Written Plan Requirement

The 2007 regulations require that contracts be issued under a plan which satisfies the regulations and which contains all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefit distributions will be made. A special rule applies to situations in which a contract has been exchanged for a successor contract, by which the successor contract is treated as part of the plan if certain conditions are met, including an information sharing agreement between the issuer and the employer. The conditions generally apply to exchanges that occur on or after September 25, 2007. They do not apply to exchanges that occurred before that date and which satisfied the requirements at that time.

Plans must be amended to comply with the 2007 regulations no later than the first day of the first tax year beginning after December 31, 2008. For calendar tax years, the deadline would be January 1, 2009.

Reliance on Model Language

Any public school employer may comply with the written plan requirements of the 2007 regulations by adopting the IRS model provisions. The plan of a public school employer will be treated as meeting the requirements of Section 403(b) to the extent the model language is adopted. The adoption of the entire plan by a public school has the same status as a private letter ruling which provides that the plan satisfies IRC § 403(b). To obtain this reliance, the employer must adopt the model language on a word-for-word basis or use language that is substantially similar in all material respects.

To maintain IRC § 403(b) status, the plan must be operated in accordance with the plan language from the effective date of the language, and the plan must continue to satisfy all other requirements of IRC § 403(b).

The IRS model language may be used by other employers to comply with IRC § 403(b). However, adoption by such employers does not have the same status, since additional or revised provisions may be necessary to comply with the 2007 regulations. This may be the case where the plan is not limited to elective deferrals, is not designed to be an employee pension plan under ERISA, is maintained by a church or church-controlled organization, or applies to one or more ministers. Nonetheless, if an employer that is not a public school has received from IRS a favorable private letter ruling under IRC § 403(b), then its adoption of appropriate model language will not result in the loss of reliance for periods prior to the effective date of the 2007 regulations.

Contracts Issued Prior to 2009

For contracts issued during the four year period beginning January 1, 2005 though December 31, 2008 by an issuer that does not receive contributions under the plan in a later year -- for example, because the issuer was discontinued as an issuer under the plan -- the contract will satisfy IRC § 03(b) if either the employer makes a good faith effort to include the contract as part of the plan, or the issuer makes a good faith effort prior to making any distributions or loans to contact the employer to exchange information necessary to satisfy IRC § 403(b).

Contracts issued prior to 2009 by an issuer that ceases to receive contributions under the plan prior to January 1, 2009, and which contracts are held on behalf of participants who on January 1, 2009 are former employees or beneficiaries, need not have their terms included in the plan; provided that, if the participant or beneficiary requests a loan, the issuer makes the loan only after it extends reasonable efforts to determine if the individual has had any other loans outstanding from qualified plans in the prior 12 months, and the highest outstanding balance of any such loans during that period.

If a contract is issued in an exchange after September 24, 2007 and before January 1, 2009 by an issuer that is either receiving contributions under the plan or has an information sharing agreement in place, then the information sharing conditions do not apply to the intermediate contract.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.