Written Plan Requirement for 403(b) (and 457)

A major service provider in retirement plans recently issued a new advisory on 403(b) plan document requirements. This post is to disagree with most of what that advisory says. (Most of these comments apply to 457 plans as well, but with less force because they tend to be in better shape with respect to compliance issues.)

First, they say that there is no written plan requirement in 403(b), which seems right after a cursory glance. 403(b) is essentially a laundry list of requirements imposed on the "annuity" or "contract" (including custodial accounts and retirement income accounts) to get tax-deferred status for contributions to it. However, 403(b)(5) says that if 403(b) applies to more than one annuity, "such contracts shall be treated as one contract."

The effects of 403(b)(5) is not simply with respect to operational compliance; it applies to 403(b) in its entirety. The effect of this is that two annuities each including the 402(g) deferral limits are treated as one contract with twice the limit. And two contracts allowing loans are treated as one contract with an impermissible loan limitation.

You could argue that this does not matter where only one annuity can receive contributions during a year, because 403(b) is simply an element of determining tax liability for the year. However, where the requirement of 403(b) applies after the contributions are made (again, as with loan limitations), this argument is weaker. And it certainly fails in the non-plan, multi-vendor environment where there are certainly at least two options available to each employee.

And, where there is a plan and it is subject to ERISA, all of this technical tax analysis is irrelevant. ERISA has a specific written plan document requirement.

Next, the advisory says not to worry because the final regulations are not out, and won't be effective before 2008. The problem with this statement is the advisory's assumption that a writing requirement is entirely a creation of the proposed regulations, which it is not. A 403(b) that is not in compliance for 2007 because of a failure to deal with the "one contract" language of 403(b)(5) simply is not in compliance and not a 403(b) annuity.

Last, the advisory says that the Department of Labor has never been interested in seeing 403(b) documents where ERISA applies and that the DOL has never said what has to be in an ERISA 403(b) document. 29 U.S.C. 1102(a) says: "Every employee benefit plan shall be established and maintained pursuant to a written instrument." That requirement is not conditional on DOL enforcement policy or the issuance of content regulations. The fact is that people have been writing qualified plan, 457 and 409A plan documents for a long time, and the adjustments in content to make those into compliant 403(b) documents are trivial (our 403(b) documents, marked up from approved prototype 401(k) documents, took about 20 hours to modify). This argument will hold no water if a DOL auditor or a court asks for you plan document.

There is another thread running through the advisory that needs to be addressed, references to amendment deadlines. These references are an echo of the remedial amendment period rules that apply to qualified plans under 401(b). These rules apply only to qualified plans. They have no application to 403(b) or 457. The timing requirement for all 403(b) rules is, in fact, the first day of the first plan year to which the requirement applies. To the extent that the final regulations provide greater detail or liberalize the rules, the IRS can certainly delay the effective date of the regulations. But the effective dates for requirement that are clear under existing law are unaffected.

What is left of the advisory? First, what I call the "I have always relied on the kindness of strangers" defense is asserted. This says, in effect, that IRS and DOL will continue to be nicer to 403(b) employers and participants than they have to be. Given the number of 403(b) plans and arrangements in force and the fact that regulators routinely go easier on governmental and charitable organizations and their employees, there is some truth to that assertion. However, it does not help with several things. First, a lawyer cannot properly opine that the attempted 403(b) meets the requirements of 403(b). Second, nobody can certify to anyone (e.g., trustees, custodians, payroll administrators, paying agents, Form 5500 and employee return preparers, auditors, etc.) that this is a good 403(b). Third, the courts are not bound at all by IRS or DOL enforcement policy, although they do, obviously, give effect to the remedial amendment period for qualified plans. Last, if an IRS or DOL agent decides, for whatever reason, to pursue the issue (say, the employer has done bad things otherwise or the 403(b) is an element of an excess compensation arrangement), prior non-enforcement will not be a defense.

All of that is not to say that everybody should panic and scramble to get a writing in place before 2007, which is obviously not going to happen. It is simply to say that there is a business risk in not getting a writing in place soon, and that employers should be making fully-informed decisions whether or not to do so.

All of that also indicates that 403(b) documents should be reviewed and/or amended annually. This can be a problem with the current market structure because annuity and custodial account forms of contract are not modified every year. At BPS, we structure the 403(b) document service on a maintenance model, reviewing every year, and amending if needed every year.

Last, Benefit Plan Solutions has, and has had for some years, 403(b) written plans and non-plans. They follow a prototype format and are very simple to use. Please feel free to call or fax to 888-277-1017 or e-mail to geertom@gmail.com or benefitplansolutions@gmail.com for more information.