403(b) amendments

[Guest Kathleen Meagher]

Rev. Proc. 97-41 says that 403(B) plans must be amended for SBJPA by the end of the 1998 plan year, but that qualified plans have until the end of the 1999 plan year to be amended for the GUSt requirements generally. Any ideas about why the IRS chose the require 403(B) plans and contracts to be amended earlier?

This seems like a simple-minded question, but I'll ask it anyway. For a non-ERISA plan, what would be the consequences if the amendment is late? As 403(B) plans aren't qualified, what can the IRS do about incorrect documents? The audit guidelines focus on operational errors.

(As you might have guessed, I have a new client that missed the 12/31/98 amendment date.)

[MWeddell]

Actually, Rev. Proc. 97-41, Sections 1.02(4) and 12 says that the deadline for amending 403(B) plans or annuity contracts to comply with SBJPA, GATT, and USERRA is the first day of the first plan year beginning on or after January 1, 1998. I wouldn't worry about missing that deadline though, based on verbal conversations I've had with IRS and DOL officials. [As usual, their verbal statements aren't binding, but it lets you know what their current views are.]

The reason why qualified plans get a longer deadline for amendments is that Section 401(B) doesn't apply to 403(B) plans, so the IRS doesn't believe it has to right to extend a 403(B) plan remedial amendment period. The good news is that the Code doesn't require a 403(B) plan to be written anyway, so the IRS doesn't demand a written 403(B) plan during any audits. The only example in Rev. Proc. 97-41 deals with the annuity contract, not the plan document, being timely amended. So much for the IRS deadline. In short, there's no real deadline for amending a non-ERISA 403(B) plan because there's no requirement for a written plan document to begin with.

What if we're dealing with an ERISA 403(B) plan? This doesn't make a difference to the IRS, but now we'd have to consider what the DOL would do. It's possible that the DOL could assert that the failure to timely amend a plan document violates ERISA 402(a)(1) and ERISA 404(a)(1)(D), but they've never been very rigorous about asserting that. I believe a strict reading of USERRA along with the SBJPA states that USERRA's veteran reemployment rights provisions should have been in the 403(B) plan document by 12/12/1996 (still assuming that we're dealing with a 403(B) program that is an ERISA plan, not the elective deferral only variety). However, the DOL doesn't have a hard and fast deadline so that if your amendment is done before the DOL were to ever audit your plan, it'd probably be fine. Think about how many years retroactively we made TRA'86 amendments to our clients' plans (with an IRS remedial amendment period but no parallel extension from the DOL) and the DOL never challenged the timeliness of those amendments.

I'd tell your client to amend the plan ASAP, but it's unlikely that any harm will occur as a result of the late amendment.

[Guest djaszi]

Question: Can a bank or trust company[with valid trust or custodial powers and otherwise meeting the requirements of 408(n)] establish a custodial account to hold mutual funds as a vehicle for the 403(B) plan, or does the custodial account need to be established and maintained by a registered investment company?

Analysis:

Under Code Section 403(B)(7), a qualified employer/sponsor may establish a "custodial account for regulated investment company stock" to provide a valid vehicle for maintaining

investments (in mutual funds) under the

403(B) plan. The custodial account is required to satisfy the provisions of

Section 401(f)(2).

Code Section 401(f)(2) and definitions under the regulations, indicate that the custodian may be a bank under 408(n). Thus, it would seem clear that a bank or trust company which meets the 408(n) definition can be the custodian and hold the mutual fund assets.

My only misgiving about this conclusion is that I have not seen this done in practice, at least where the bank (or trust company) was not affiliated with any mutual fund (i.e., a captive trust company of a mutual fund family).

Please indicate if you agree. Thanks

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michael