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IRS Issues Model 403(b) Plan for Public Schools and Other Tax-Exempt Entities
January 2008 The Internal Revenue Service has released a new revenue procedure in which it provides important guidance on certain aspects of the final 403(b) regulations issued in July 2007. Those regulations required § 403(b) plan sponsors, for the first time, to comply with the type of detailed written plan requirements that were previously applicable to other types of qualified retirement plans. The revenue procedure provides a model 403(b) plan that different types of employers may use to varying degrees, as well as guidance relating to the application of § 403(b) to contracts or custodial accounts that were issued or exchanged before January 1, 2009, the effective date of the final regulations. The IRS states that it is issuing the model plan because of concerns about the costs that may be faced by employers — like public schools — that do not already have existing plan documents. The IRS's goal in issuing the model plan is to help alleviate some of that cost. Model 403(b) Plan The model plan language is intended for use by plans to which the only contributions made are pre-tax elective deferrals by employees. In other words, in order to use the model language, the plan cannot include any Roth, employer matching, or other nonelective employer contributions. The model plan includes several standard provisions on such issues as:
The plan also provides a 15-day deadline for depositing deferred amounts. Plans are given the option of whether to adopt some of the model plan provisions, including one that would automatically enroll employees in the plan with a default deferral of five percent of compensation unless the employee elects otherwise. Public School Plans. A public school's 403(b) plan will be treated as having a favorable private letter ruling from the IRS if:
It is also possible, however, for public school plans to adopt some provisions of the model plan while not adopting others. In that event, the adopted provisions will be treated as meeting the requirements of § 403(b). This applies only if the employer adopts the model language on a word-for-word basis or adopts an amendment that is substantially similar in all material respects. Other Entities. Other tax-exempt entities that are eligible for or already have a § 403(b) plan may also use language from the model plan to comply with some of the written plan requirements imposed by the final § 403(b) regulations. The IRS makes clear, however, that those types of employers must determine the extent to which the use of the model language is appropriate for their specific plan. Even after making that determination, however, a non-public school employer's adoption of the model plan language is not the equivalent of a private letter ruling. Our Thoughts Although the IRS intended for the model plan to make it easier (and less expensive) for public schools to comply with the new written plan requirements, it may not have the desired result. Robert Toth, of Baker & Daniels, LLP, states that adopting the model plan language will require significant effort and expense on the part of vendors and be difficult to accomplish by the January 1, 2009, compliance deadline. Toth also points out that some of the model plan language is inconsistent with several standard provisions found in most § 403(b) contracts. It remains to be seen whether those and other concerns raised by benefits professionals will prevent the widespread acceptance and adoption of the model plan language. Revenue Procedure 2007-71 appears in Internal Revenue Bulletin 2007-51, which can be found online at www.irs.gov/pub/irs-irbs/irb07-51.pdf. Copyright © 2008 M. Lee Smith Publishers LLC. This article is an excerpt from Benefits and Compensation Law for Nonprofits (ISSN 1525-8025). Benefits and Compensation Law for Nonprofits is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that neither the author(s) nor its publisher is engaged in rendering legal, accounting, or other professional services through its pages. If legal advice or other expert assistance is required, the services of a competent professional should be sought. (From a Declaration of Principles jointly adopted by a committee of the American Bar Association and a committee of Publishers and Associations.) Additional Resources Newsletters for people who really need to know about benefits: |
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