403(b) Prototype Plans and Sample Plan Language

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May 2009

TAX SHELTERED ANNUITIES; Pg. 5

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403(b) Prototype Plans and Sample Plan Language

The Service has announced its intention to establish a program for the pre-approval of prototype plans under IRC Section 403(b). Announcement 2009-34 includes a draft revenue procedure that contains the Service's proposed procedures for issuing opinion letters as to the acceptability under Section 403(b) of the form of prototype plans. The Service is simultaneously posting draft sample plan language on its website (www. irs.gov) for use in drafting 403(b) prototype plans. Before finalizing the revenue procedure and sample plan language, the Service is inviting interested persons to submit comments.

Background: Sponsors of 403(b) plans are required to maintain a written plan under the final regulations issued in 2007. The final regulations were generally effective January 1, 2009. (See Tax Facts News, September 2007, page 2.) But, in response to numerous extension requests from plan sponsors and practitioners, the Service announced in Notice 20093, 2009-2 IRB 250, that it would not treat a 403(b) plan as having failed to satisfy the statutory and regulatory requirements if (among other conditions) by December 31, 2009 the sponsor of the plan had adopted a written plan that is intended to satisfy the requirements effective as of January 1, 2009. (See Tax Facts News, January 2009, page 2.) In the interim, the Service provided model plan language in Revenue Procedure 2007-71, 2007-2 CB 1184, to be used by public schools and other eligible employers. (See Tax Facts News, January 2008, page 2.) The Service makes clear in Announcement 2009-34 that the model plan language is not modified by the draft revenue procedure; accordingly (and absent further notice), public schools and other eligible employers may continue to use the model language set forth in Revenue Procedure 2007-71. Highlights of the Draft Revenue Procedure

An eligible employer is a public school or an employer described in Section 501(c)(3) that is exempt from tax under Section 501(a).

An eligible 403(b) prototype plan sponsor is any company, firm, or individual that expects at least 30 eligible employers to adopt its 403(b) prototype plan basic plan document(s).

A mass submitter is any person that submits opinion letter applications on behalf of at least 30 prototype sponsors that have adopted, on a word-for-word identical basis, the same basic plan document.

A governmental plan under Section 414(d) or a non-electing church plan may rely upon a favorable opinion letter that the form of its 403(b) prototype plan satisfies the requirements of Section 403(b). However, a favorable opinion letter is not a determination as to whether the plan is a Section 414(d) governmental plan or a non-electing church plan.

A 403(b) prototype plan is standardized if: (1) elective deferrals are the only contributions under the plan; or (2) the plan provisions, other than for elective deferrals, benefit all eligible employers' nonexcludable employees in the employer's controlled group under a design-based nondiscrimination safe harbor allocation formula.

An eligible employer may rely upon a favorable opinion letter if the plan is a standardized plan and either: (1) the only contributions allowed under the plan are elective deferrals; or (2) all the employers in the adopting employer's controlled group are eligible employers.

An adopting eligible employer may not rely on the opinion letter with respect to whether contributions under the plan (other than elective deferrals) satisfy the requirements of Sections 401(a)(4) and 410(b) if either: (1) the plan is not standardized; or (2) the plan permits contributions other than elective deferrals and the adopting eligible employer's controlled group includes any employer that is not an eligible employer. In this case, the adopting eligible employer can request a determination letter (as soon as a 403(b) determination letter program is available) to obtain reliance for Sections 401(a)(4) and 410(b). Governmental plans and non-electing church plans are not subject to these requirements and may, therefore, rely on the opinion letter without regard to the form of the plan.

The IRS will not review any annuity contracts or custodial accounts under the plan. The prototype plan's terms (basic plan document and adoption agreement) must satisfy the statutory and regulatory requirements and must override any contract or account terms that are inconsistent with the plan. However, employers may provide multiple investment arrangements (for example, annuity contracts and custodial accounts) in a plan or have different features in those arrangements.

A retroactive remedial amendment is allowed so that an eligible employer can retroactively correct defects in its written 403(b) plan's form by timely adopting an approved 403(b) prototype plan or by otherwise timely amending its plan and submitting a request for a determination letter once a determination letter program is available for 403(b) plans. The eligible employer must amend its plan retroactive to the first day of the plan's remedial amendment period.

The IRS will not issue letters for: (1) TEFRA church defined benefit plans; (2) plans that include provisions applicable only to churches, qualified church-controlled organizations, church-related organizations, or ministers; or (3) plans that provide graduated vesting.

An opinion letter provides reliance only for Title II of ERISA. However, the IRS may decline to issue an opinion letter where the plan fails to satisfy a Code provision that is parallel to a provision in ERISA Part 2 of Subtitle B of Title I. SEK

May 19, 2009