In 2017, the IRS established a “remedial amendment period” and provided guidance on plan amendment deadlines for sponsors of 403(b) plans. Nongovernmental and governmental employers who sponsor 403(b) plans will be able to correct any plan document issues retroactively, without penalty, if such corrections are made by March 31, 2020.
Typically, plan amendments to correct plan document-related errors cannot be effective earlier than the first day of the plan year in which the amendment is adopted. During a “remedial amendment period,” however, plan sponsors can amend their plan documents retroactively and without penalty, if such amendments are necessary to comply with IRS rules. March 31, 2020 is the end of the IRS’s first 403(b) plan “remedial amendment period.”
Plan sponsors may, without penalty, correct plan provisions that fail to meet requirements under Section 403(b) of the Internal Revenue Code (“Code”):
- By adopting an IRS pre-approved 403(b) plan by March 31, 2020 (the IRS has published a list of such pre-approved 403(b) plans here); or
- If the plan sponsor already maintains an individually designed plan, then amending it to comply with the Code under Code Section 403(b) by March 31, 2020.
Correcting plan provisions may involve adding required provisions, or correcting defective provisions. In general, the correction must be retroactive to the later of January 1, 2010, or the plan’s effective date. However, certain Code requirements may require different effective dates.
To be eligible for this relief, the plan sponsor must have previously adopted a written 403(b) plan document by December 31, 2009 (or the original effective date of the plan, if the plan went into effect later). Plan sponsors who didn’t adopt a written 403(b) plan document timely must correct the plan’s violations under the IRS’s Voluntary Correction Program (“VCP”), which is a part of the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) described in Rev. Proc. 2019-19.
Not all 403(b) plan compliance issues can be corrected by retroactive plan amendment through the remedial amendment period. For example, if the 403(b) plan document complies with IRS rules in form, but not operation, such operational issues generally must be corrected through EPCRS.
Going forward, the IRS will now include changes to the Code Section 403(b) requirements on its annually updated “Requirement Amendments List.”
- For nongovernmental 403(b) plans, any new changes to the Code Section 403(b) requirements must be incorporated into the plan document by the end of the second calendar year after the year in which the change appears on the IRS’s Required Amendment list.
- For governmental 403(b) plans, any new changes to the Code Section 403(b) requirements must be incorporated into the plan document within 90 days after the close of the third regular legislative session that begins on or after the date the change appears on the IRS’s Required Amendment list.
The IRS has also provided a short extension for some individually-designed plans to correct prior amendments that do not comply with Code Section 403(b). If a plan sponsor of an individually designed plan has previously adopted an amendment that violates Code Section 403(b), that amendment can be corrected retroactively to the date of the amendment if corrected by the later of (i) March 31, 2020 or (ii) the end of the second calendar year following the effective date of the amendment. This means that, for example, if such amendment was originally adopted in 2018, it could be corrected without penalty until December 31, 2020.
Nongovernmental and governmental 403(b) plan sponsors should take advantage of the 403(b) plan “remedial amendment period” and have legal counsel review their 403(b) plan documents to ensure that the plan document is up to date and incorporates all of the IRS’s required provisions. We expect that many plan sponsors will take advantage of this relief period since many 403(b) plan documents are relatively new (the requirement to adopt a written 403(b) plan document was only first imposed in 2009), and this is the end of the first remedial amendment period since that time.
This is also a good time to review 403(b) plan operations to ensure that the plan has been operated in accordance with its terms. If discovered early, many operational issues can be self-corrected under EPCRS without having to make a corrective filing with the IRS or pay the applicable user fee.
If you have any questions about 403(b) plans, and whether your plan is compliant with Code Section 403(b), please do not hesitate to reach out to any of your contact(s) on the Morris, Manning & Martin, LLP Employee Benefits and Executive Compensation team.