403(b) plan with employer contributions

[Guest Melissa Winslow]

I have a 501©(3) organization that established a 403(B) plan in 1989. A plan document exists which requires an employer contribution equal to 4% of compensation.

From the reading I have done it appears the plan document does not need to be amended for GUST as it is not a qualifed plan - true?

And, if the sponsor wants to take advantage of the new catch-up contribution rules under EGTRRA (subject to IRC 402(g)(7)), would a "good faith" amendment be appropriate and if so, when should it be adopted assuming a calendar year end plan?

[Carol V. Calhoun]

There were some GUST changes with which the plan should have complied--e.g., USERRA provisions. However, the IRS appears at least informally to be taking the position that unlike a 401(a) plan, which has a written plan document requirement under 401(a)(1), a 403(B) plan does not have any requirement of a plan document on the IRS side. Thus, it is looking at actual compliance, as opposed to plan amendments.

The plan would be covered by ERISA, and should therefore be amended in such a way that the written document reflects actual practice. However, the ERISA time deadlines are less clear, and the penalties do not include loss of favorable tax status. Thus, in many instances an employer that discovers it has a problem like this merely amends for the future, but does not treat the plan as having lost 403(B) status for the past.

[mbozek]

Unlike a qualifed plan, a 403(B) plan is not required to be amended for changes in the tax law since it cannot be disqualfied for the failure to amend the plan. A 403(B) plan is really an annuity contract under IRC 72 in which the contributions and earnings are tax deferred. In fact the IRS audit guidelines state a that a 403(B) plan cannot be penalized for the failure to be administered in accordance with its terms. It is only required to be operated in accordance with the tax law. While the plan should be amended to comply with all applicable changes in the tax law there is no fixed deadline for amending a 403(B) plan nor is there any prohibition against retroactive amendment of the plan to conform with amendments which were effective in a prior year.