Should I correct 403(b) Plan Doc Failure with VCP?

[Guest jc1457]

I have a client who does not have a plan documen for their 403(b) Plan. The employer contributes to the 403(b) Plan. We are in the process of installing a plan document for them.

My question is - can I file under the VCP Program??? I was told by an IRS Agent that since 403(b) Plans are not required to be in writing, you cannot fix this under the VCP Program. This answer does not seem right to me.

THank you!!!

Linda

[Guest mjb]

Under IRS regulations issued on 7/23 all 403b plans will be required to be in writing on Jan 1, 2009. Under current law 403b plans in which an employer contributes are required to be in writing under ERISA, not the IRC. Adopting written plan document in advance of 1/1/09 date will bring the into compliance on 1/1/09. I think what the agent is telling you is that the plan is not in violation of any IRS rules for 403b plans at this time and there is no penalty under ERISA for not having a written document.

[Guest jc1457]

Under IRS regulations issued on 7/23 all 403b plans will be required to be in writing on Jan 1, 2009. Under current law 403b plans in which an employer contributes are required to be in writing under ERISA, not the IRC. Adopting written plan document in advance of 1/1/09 date will bring the into compliance on 1/1/09. I think what the agent is telling you is that the plan is not in violation of any IRS rules for 403b plans at this time and there is no penalty under ERISA for not having a written document.

Thank you so much - this was so helpful!

[Peter Gulia]

Even if there is no tax-compliance problem, consider ERISA.

Might the employer have failed to deliver a summary plan description, failed to file a Form 5500, failed to deliver a summary annual report?

Might the employer have failed to administer the plan according to its partially unwritten, or inconsistently written, terms?

Might the employer have failed to cause the plan to pay a death benefit or survivor annuity to a participant's surviving spouse?

There are steps an employer and plan fiduciary can take to deal with these problems.

[Guest mjb]

Even if there is no tax-compliance problem, consider ERISA.

Might the employer have failed to deliver a summary plan description, failed to file a Form 5500, failed to deliver a summary annual report?

Might the employer have failed to administer the plan according to its partially unwritten, or inconsistently written, terms?

Might the employer have failed to cause the plan to pay a death benefit or survivor annuity to a participant's surviving spouse?

There are steps an employer and plan fiduciary can take to deal with these problems.

Fid counsel: can you explain what the risk is for the above issues? Worst case for failure to file 5500 is $1500 penalty if the plan is subject to ERISA. If not then there is no penalty under ERISA.

[Peter Gulia]

Many (but not all) of these and other risks of failing to administer a plan often are modest. But usually they don't get better with age. Inexpensive corrections can make it worthwhile to get a plan on a better track before a serious contingent liability builds up.

Here's one exposure that can be real money: A participant named a beneficiary other than his or her spouse. The participant never made, and the spouse didn't consent to, a qualified election. After the participant's death, the named beneficiary submitted a claim to an insurer or custodian, which paid the full account balance (without any intervention by the employer). Some time later, the participant's surviving spouse files a claim, demanding at least his or her qualified survivor annuity. If the participant had a six-figure account balance, the award or settlement in favor of the surviving spouse might be significant.

[Guest mjb]

Isnt there a statute of limitations for filing claims that is based on the s/l for a similar action under state law that limits the risk?

[Peter Gulia]

ERISA includes statutes of limitation. But the time for barring a claim might not begin to run until a surviving spouse in the exercise of reasonable diligence would have known that he or she had a claim. And a plaintiff's lawyer might argue that breaching plan fiduciaries concealed the situation by failing to meet their statutory and fiduciary duties to deliver a summary plan description, summary annual reports, qualified-election notices and forms, and other information that a beneficiary needed for his or her protection (including to know that he or she had a right). Again, the sooner the plan fiduciaries put the plan's administration on the right track, the likelier they can get statutes of limitation and other defenses helping them.