4.72.13  403(b) Plans

Manual Transmittal

November 12, 2014

Purpose

(1) This transmits revised IRM 4.72.13, Employee Plans Technical Guidance - 403(b) Plans.

Material Changes

(1) This IRM 4.72.13 is being re-issued to update existing procedures for examining IRC 403(b) plans.

(2) These procedures have been updated to include legislative and regulatory changes since the last issuance. This document is comprehensive of the 2007 final regulations and other guidance issued after those regulations.

Effect on Other Documents

IRM 4.72.13 dated March 1, 2005, is superseded.

Audience

TE/GE (Employee Plans)

Effective Date

(11-12-2014)


Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

4.72.13.1  (11-12-2014)
Overview

  1. Guidance is provided on how to examine a plan described in IRC 403(b).

  2. The guidance contained in this section is designed primarily to assist Employee Plans (EP) agents in identifying relevant issues relating to IRC 403(b) plans.

  3. In examining IRC 403(b) plans, agents must ensure that the issues under consideration satisfy the applicable requirements of the Treasury Regulations (Treas. Reg.) in both form and operation.

  4. An agent should consult the Internal Revenue Code (IRC), Treasury Regulations and other relevant guidance for further development of a particular issue. Accordingly, cites are provided where appropriate.

    .

  5. The issues discussed this IRM may not be relevant for every examination.

  6. Examination steps and techniques identified should be modified based on the actual examination issue encountered.

  7. These guidelines cannot be, nor are they intended to be a precedent or comprehensive statement of the legal position of the IRS.

  8. These guidelines are not to be relied on or cited as authority by either taxpayers or IRS agents.

  9. These guidelines are subject to future change in accordance with developments in the law governing IRC 403(b).

4.72.13.1.1  (11-12-2014)
Technical Overview

  1. Historical background and regulatory framework of IRC 403(b) plans are as follows:

    1. IRC 403(b) was first added to the Code in 1958.

    2. In 1964, pre-Employee Retirement Income Security Act of 1974 (ERISA) regulations were issued detailing some of the basic statutory provisions of IRC 403(b). These regulations were later amended as new provisions were added to IRC 403(b).

    3. Treas. Reg. 1.401(a)(31)-1, Q&A-1 provides that the direct rollover requirements apply to IRC 403(b) annuities, effective for years beginning after 1992.

    4. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) amended various sections of IRC 403(b) effective for years beginning after 2001, with respect to compensation, deferral limitations, age 50 catch-up contributions, rollovers, and distributions.

    5. Effective for years beginning on and after January 1, 2003, Treas. Regs. 1.401(a)(9) were issued pertaining to the minimum distribution requirements under IRC 401(a)(9).

    6. On November 16, 2004, proposed regulations were issued which constituted a comprehensive update of the IRC 403(b) regulations.

    7. Effective for years beginning after 2005, EGTRRA provides that IRC 403(b) plans may allow for Roth contributions. See IRC 402A.

    8. The Pension Protection Act of 2006 (PPA '06) amended various provisions of IRC 403(b) by making certain EGTRRA provisions permanent; and with respect to hardship distributions.

    9. In April 4, 2007, Treas. Regs. were issued under IRC 415, effective for limitation years beginning after June 30, 2007, which provided changes to the definition of 415 compensation to include certain types of post-severance compensation.

    10. On July 26, 2007, final IRC 403(b) regulations were issued, generally effective on January 1, 2009. These final regulations reflect the amendments made to IRC 403(b) by PPA ’06, and require that all IRC 403(b) plans adopt a written plan document effective as of January 1, 2009.

    11. Rev. Proc. 2007-71 provides model plan language that may be used by public schools to comply with the written plan requirement. Other IRC 403(b) plan sponsors may rely on the language to the extent it is applicable for their organization.

    12. The Heroes Earning Assistance and Relief Tax Act of 2008 (HEART), passed on June 17, 2008, added death benefits for USERRA-qualified active military service as required under IRC 401(a)(37), effective for years beginning on or after January 1, 2010.

    13. Effective with plan years beginning after December 31, 2009, the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) added provisions to allow a rollover of benefits by a nonspouse beneficiary, generally subject to the same rules as other eligible rollovers.

    14. Notice 2009-3 delays the written plan requirement to December 31, 2009, if certain requirements are met.

    15. Rev. Rul. 2009-18 makes obsolete certain IRC 403(b) guidance that no longer applies.

    16. Announcement 2009-34 includes a draft revenue procedure for an IRC 403(b) pre-approved program. Along with Announcement 2009-34, the IRS issued a Listing of Required Modifications (LRMs) for IRC 403(b) plans

    17. Announcement 2009-89; 2009-52 I.R.B. 1009 announces an initial remedial amendment period for IRC 403(b) plans that meet certain conditions and either adopt a pre-approved plan with a favorable opinion letter or apply for a determination letter when those programs are available.

    18. Rev. Rul. 2011–7 provides guidance on the termination of an IRC 403(b) plan.

    19. Rev. Proc. 2013-12 expanded the Employee Plans Correction Resolution System (EPCRS) to resolve matters arising from a failure to comply with new requirements imposed by the final IRC 403(b) regulations. This includes written plans not timely adopted or failure to follow the written plan in 2009 and later plan years.

    20. Rev. Proc. 2013-22 sets forth the procedures for issuing opinion and advisory letters for pre-approved IRC 403(b) prototype plans and IRC 403(b) volume submitter plans. Rev. Proc. 2013-22 also modifies the remedial amendment period in Announcement 2009-89 and provides that it is not anticipated that determination letters will not be issued for individually designed IRC 403(b) plans. In connection with Rev. Proc. 2013-22, the IRS issued sample plan language in the form of LRMs for IRC 403(b) plans.

    21. Rev. Proc. 2014-28, issued on March 25, 2014, amended the program for pre-approved plans and extended the deadline to April 30, 2015.

4.72.13.1.2  (11-12-2014)
General Requirements

  1. Historically, an IRC 403(b) plan was an arrangement under which an employer purchased an individual annuity contract from an insurance company on behalf of and on a tax-deferred basis for an employee. Over the years IRC 403(b) plans became more like qualified retirement plans. Accordingly, effective January 1, 2009, IRC 403(b) plans must, in part:

    1. Be maintained pursuant to a written plan that satisfies the requirements of IRC 403(b) in form and operation. The written plan must set forth the material terms and conditions for eligibility, benefits, limitations, available contracts, and the time and form of benefit distributions applicable to the plan

    2. Comply with certain nondiscrimination and coverage rules (including IRC 401(a)(4), IRC 401(a)(17), IRC 401(m), IRC 410(b), and universal availability)

    3. Ensure that elective deferrals do not exceed the IRC 402(g) limit

    4. Conform to the minimum distribution rules of IRC 401(a)(9)

    5. Provide a participant with a meaningful opportunity to elect a direct rollover to another eligible retirement plan

    6. Satisfy the incidental benefit requirements in IRC 401(a)

    7. Not exceed the applicable limitations of IRC 415(c)

    8. Not be transferrable

    9. Have rights of the employees under the annuity contract be nonforfeitable (non-vested amounts are permitted, but are treated as a 403(c) contract until they vest)

    Note:

    See Treas. Reg. 1.403(b)-3(a).


    Example 1: The employees of Public School District Y participate in an IRC 403(b) plan. The written plan consists of multiple documents, including documents that are incorporated by reference, rather than a single written plan document. This is acceptable under IRC 403(b).
    Example 2: Employer A is an organization described in IRC 501(c)(3) and exempt from tax under IRC 501(a). Employer A maintains an IRC 403(b) plan for its employees. The IRC 403(b) plan consists of a lengthy plan document, and employees are informed of plan features through annual summary plan descriptions.

  2. The plans in Examples 1 and 2 are subject to the requirements of IRC 403(b).

    1. An IRC 403(b) plan is subject to Title II of ERISA (relating to the IRC) but may not be subject to Title I of ERISA.

    2. For example, the plan described in Example 1 may not be an employee pension benefit plan under Department of Labor (DOL) Reg. 2510.3-2(f), but the plan is nevertheless subject to the requirements of IRC 403(b).

  3. At the outset of the examination of an IRC 403(b) plan, the agent should determine if the plan is subject to Title I of ERISA. See IRM 4.72.13.1.6, IRC 403(b) Filing Requirements.

4.72.13.1.3  (11-12-2014)
General Characteristics

  1. An IRC 403(b) plan is a retirement plan under which a public school or an organization described under IRC 501(c)(3) and exempt from tax under IRC 501(a) purchases annuity contracts or contributes to custodial accounts for its employees. It also includes a retirement income account under IRC 403(b)(9).

  2. IRC 403(b) plans are exempt from the requirements applicable to qualified annuity plans under IRC 403(a) and are governed by their own separate requirements under IRC 403(b).

  3. IRC 403(b) plans are also known as:

    • IRC 403(b) arrangements

    • Tax-sheltered annuities

    • Tax-deferred annuities

    • Annuity contracts

      Note:

      Throughout this IRM, the term "annuity contract" includes custodial accounts and retirement income accounts unless otherwise specified.

  4. Contributions to an IRC 403(b) plan may consist of:

    1. Elective deferrals (including Roth contributions)

    2. Employer contributions (including one-time irrevocable elections and condition of employment)

    3. After-tax employee contributions

    4. Rollover contributions

  5. In an IRC 403(b) plan that consists of elective deferrals, an employer gives participants a choice between receiving an amount in cash or having the employer contribute that amount to the IRC 403(b) plan.

  6. Contributions made to an IRC 403(b) plan are generally not includible in the participants' gross income for income tax purposes until distributed, even if the participants had the ability to receive the contributions as taxable wages in the year of the contributions. However, a plan may permit contributions to be treated as Roth contributions, in which case the contributions are includible for income tax purposes in the participants’ gross income when made.

  7. Earnings on non-Roth contributions are also tax deferred until distributed, while Roth earnings are not taxed if made under a qualified distribution.

  8. Distributions from an IRC 403(b) plan are taxable under IRC 72, relating to annuities.

  9. Generally, salary reduction contributions to an IRC 403(b) plan, as defined in IRC 3121(a)(5)(D) (including elective deferrals, one-time elections and condition of employment), are subject to Federal Insurance Contributions Act (FICA) tax at the time of contribution, unless the employee is exempt from FICA tax.

    1. Employees of certain governmental and church employers may be exempt from FICA. See IRC 3121(b)(7) and IRC 3121(b)(8).

    2. The employer sponsoring an IRC 403(b) plan is generally not entitled to a deduction for wages paid to employees because the employer is exempt from income tax. The employer, however, is responsible for paying the employer share of FICA, and withholding income and FICA taxes, if applicable.

  10. The following examples illustrate that IRC 403(b) plans may involve both employer and individual tax matters.

    Example 3: Hospital M maintains an annuity plan intended to be an IRC 403(b) plan (Plan). Hospital M is not exempt from FICA and the Plan does not permit Roth contributions. The Plan provides only for employer contributions that are not elective deferrals and is funded through annuity contracts. It is discovered on examination that the Plan is not an IRC 403(b) plan. Unless Hospital M can correct under EPCRS, the tax ramifications for all open years under the statute of limitations, are as follows:

    1. The contributions made to the Plan, adjusted for earnings, are includible in the employees' gross income to the extent they are vested,

    2. Employees are responsible for FICA taxes, and

    3. The employer is responsible for income tax and FICA withholding.

    Example 4: Assume the same facts as in Example 3, except that the Plan is an IRC 403(b) plan and it provides both elective deferrals and employer contributions that are not elective deferrals. The tax ramifications would also include:

    1. The elective deferrals are subject to FICA tax at the time of contribution.

    2. Hospital M is responsible for withholding income taxes and the employees' portion of FICA.

    3. Elective deferrals and employer contributions are not subject to income tax until distributed.

4.72.13.1.4  (11-12-2014)
Aggregated Annuity Contracts

  1. All annuity contracts (including custodial accounts and retirement income accounts) purchased by an employer on behalf of an employee are treated as a single annuity contract for purposes of applying the requirements of IRC 403(b). See IRC 403(b)(5) and Treas. Reg. 1.403(b)-3(b)(1).

4.72.13.1.5  (11-12-2014)
IRC 403(b) and Qualified Plans

  1. Although there are many similarities, IRC 403(b) plans differ from qualified plans in some important respects, such as:

    1. Only certain types of tax-exempt employers, governments and ministers may sponsor an IRC 403(b) plan.

    2. Funding vehicles for an IRC 403(b) plan are limited to annuity contracts and custodial accounts (and retirement income accounts for churches, a convention or association of churches, or an organization described in IRC 414(e)(3)(A)).

    3. Elective deferrals to an IRC 403(b) plan are subject to universal availability, a special nondiscrimination rule instead of the average deferral percentage (ADP) test applicable to cash or deferred arrangements under IRC 401(k)(3).

    4. There is no special 10-year averaging for purposes of calculating the taxable portion of a lump sum distribution for IRC 403(b) plans.

    5. IRC 402(g) provides an increased limit on elective deferrals for certain participants in an IRC 403(b) plan.

    6. Compensation under IRC 415 is defined as includible compensation under IRC 403(b).

    7. Certain nonelective employer contributions may be made for former employees for up to five years. See Treas. Reg. 1.403(b)(3)-4(d).

4.72.13.1.6  (11-12-2014)
IRC 403(b) Filing Requirements

  1. With some exceptions, IRC 403(b) plans are required to file Form 5500, Annual Return/Report of Employee Benefit Plan. The following types of plans are exempt from filing (see instructions to Form 5500):

    • Church plans, as defined in IRC 414(e), that have not made an election under IRC 410(d)

      Reminder:

      This definition is different from the definition of Church for IRC 403(b) purposes. See IRC 403(b)(12)(B) and Treas. Reg. 1.403(b)-2(b)(5).

    • Governmental plans

    • IRC 403(b) plans that are not employee pension benefit plans under Title I of ERISA

  2. In general, an IRC 403(b) plan is not subject to Title I of ERISA if:

    1. The plan provides only elective deferrals, and

    2. The employer's involvement is limited to the minimal functions permitted under DOL Reg. 2510.3-2(f).

      Note:

      See Field Assistance Bulletin (FAB) 2007-02 and FAB 2010-01 on the Department of Labor (DOL) website at http://www.dol.gov/ebsa/403b.html. These FABs discuss types of employer involvement (including, for example, authorizing plan distributions, hardship withdrawals, or loans) that can trigger ERISA coverage.

  3. Employee Benefits Security Administration (EBSA) of the DOL, has issued the following guidance related to filing requirements for IRC 403(b) plans:

    1. FAB 2007-02 addressed the effect of the final IRC 403(b) regulations on the DOL safe harbor regulations in DOL Reg. 2510.3-2(f) regarding circumstances under which an employer remains outside the coverage of ERISA.

    2. FAB 2009-2 provided transitional relief from requirements for IRC 403(b) plans for Form 5500 annual reporting.

    3. FAB 2010-01 supplements FAB 2009-02 with respect to the scope and conditions required for transitional relief provided in FAB 2009-02. In addition, FAB 2010-01 addressed questions relating to the scope of the DOL’s safe harbor regulation in DOL Reg. 2510.3-2(f).

      Note:

      For additional information related to these FABs and other DOL guidance see http://www.dol.gov/ebsa/403b.html

  4. An IRC 403(b) plan may be required to file Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits with the IRS.

    1. Form 8955-SSA, is a stand-alone reporting form filed with the IRS to satisfy the reporting requirements of IRC 6057(a).

    2. Plans subject to Title I of ERISA must file Form 8955-SSA.

    3. Governmental plans and church plans, as defined in IRC 414(e), that have not made an election under IRC 410(d) are generally excluded from coverage under Title I of ERISA. See FAB 2009-2.

4.72.13.2  (11-12-2014)
Scope of the Examination

  1. The focused examination methodology is the standard approach to conducting IRC 403(b) examinations.

  2. Focused examinations require the examiner to review a variety of information to determine the scope of the examination and which specific issues will be examined.

  3. Under focused examinations for IRC 403(b) plans, three issues will be identified by EP Classification that the examiner must address in the examination.

    1. Based on the pre-audit review, an agent may determine additional issues to be addressed.

    2. Managerial approval is required if the total number of issues exceeds five.

  4. See IRM 4.71.1.5, Scope of the Examination for a more detailed description of the focused examination methodology.

4.72.13.3  (11-12-2014)
Pre-audit Analysis

  1. A comprehensive pre-audit analysis is important to organize the examination and to identify potential issues prior to sending out an appointment letter. See IRM 4.71.1.6, Pre-audit Analysis for a discussion of pre-audit responsibilities.

  2. IRC 403(b) plans that are not subject to Title I of ERISA are not required to file a Form 5500. Filed Form 5500s can be found on DOL's Form 5500/5500-SF Filing Search at: https://www.efast.dol.gov/welcome.html

  3. Other information should be reviewed in order to identify potentially significant issues. These sources include, but are not limited to, the Internet, Form 990, W-2 data, 5500 returns for related plans, and the Integrated Data Retrieval System (IDRS).

    1. In addition to the normal review of IDRS information, the Employment Code shown on the INOLES is useful to determine the type of employer being examined. These codes can be found in Document 6379, Exempt Organizations Management Information Systems Codes.

      Note:

      See IRM 4.71.2, Overview of IDRS Transcripts, for a description of IDRS command codes.

    2. BMFOLO shows the 501(c) ruling date and the code section the organization is exempt under.

    3. Determine whether the plan sponsor is under examination by Exempt Organizations (EO) or Federal State and Local Governments (FSLG), and if EO or FSLG has already begun an examination, contact and coordinate with the EO or FSLG specialist. Any conflicts should be resolved through the group managers.

  4. Determine whether assistance is needed from specialists such as Computer Audit Specialists (CAS), EO, and FSLG. See IRM 4.10.2.6.5.1 , Referral Criteria for a discussion of the procedures to request specialist assistance.

  5. Upon completion of the pre-audit analysis, prepare Letter 1346-D and appropriate Form(s) 5464 - Information Document Request (IDRs) for the various types of records needed to conduct the examination.

  6. If the examination involves a 2009 or later year, request a copy of the written plan prior to the initial appointment. The review of the plan will provide valuable information on how the plan should operate.

4.72.13.4  (11-12-2014)
Package Audit

  1. Package Audits include an assessment of the employer’s various filing requirements.

  2. The types of returns that fall within the EP Package Audit requirements include the following:

    • Form 5500, Annual Return/Report of Employee Benefit Plan

    • Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

    • Form 990-T, Exempt Organization Business Income Tax Return

    • Form 990, Return of Organization Exempt From Income Tax

    • Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

    • Form 941, Employer's Quarterly Federal Tax Return

    • Form W-2, Wage and Tax Statement

    • Form 1040, U.S. Individual Income Tax Return

      Note:

      Because only exempt organizations and governmental entities are eligible to maintain IRC 403(b) plans, Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income, are generally not part of the package audit in an examination of an IRC 403(b) plan.

  3. IDRS research should be conducted to determine filing requirements and whether returns have been timely filed.

  4. See IRM 4.71.1.14, Package Audit Requirements.

4.72.13.5  (11-12-2014)
Initial Interview

  1. The initial interview is an essential part of the examination process and provides a productive forum to gather information.

  2. It is important to hold the initial interview with persons who are familiar with the organization of the employer, the various deferred compensation plans maintained, and the day to day operation of the IRC 403(b) plan under examination.

  3. A properly planned and executed interview will provide an understanding of the employer’s history, operations, and accounting records.

  4. Detailed questions should be prepared in advance of the initial interview. Make sure to consider the type and structure of the employer and the types of deferred compensation plans maintained. In addition, detailed questions should be asked concerning the day to day operation of each aspect of the plan being examined. This is an important step in the preparation of a focused audit plan.

  5. Some important things to consider when preparing for an initial interview:

    1. Know what you want to accomplish.

    2. Develop a strategy.

    3. Utilize a questionnaire as an aid, but remain flexible.

    4. Conduct interviews with persons who can best answer your questions.

    5. Listen to answers.

    6. Follow up immediately if responses are ambiguous.

    7. Document responses.

  6. See IRM 4.71.1.12, Initial Interview.

4.72.13.6  (11-12-2014)
Evaluation of Internal Controls

  1. Internal controls are the procedures and practices of the plan administrator that are designed to promote and protect sound practices in plan administration and compliance with the law.

  2. The evaluation of internal controls is a continuous process beginning with the pre-audit analysis.

  3. Most of the information regarding the plan’s internal controls will likely be obtained during the initial interview.

  4. Adequacy of internal controls will determine the sample size utilized and will set parameters for the depth of review required.

  5. It is important to evaluate internal controls for each aspect of plan administration.

  6. A well-designed questionnaire will assist in the evaluation of internal controls and provide an understanding of the administrative and accounting systems that pertain to the plan. The questionnaire should be directed to those employees who are directly responsible for the administration of the plan and may be combined with initial interview questionnaires.

  7. Plan records and persons responsible for maintaining them are usually located at the employer’s place of business; therefore, the initial interview and the assessment of internal controls should be conducted at the plan sponsor's place of business. See Treas. Reg. 301.7605-1(d) and IRM 4.10.3.4, Evaluating the Taxpayer's Internal Controls.

4.72.13.7  (11-12-2014)
Written Plan Requirement Overview

  1. Treas. Reg. 1.403(b)-3(b) introduced a new IRC based written plan requirement for IRC 403(b) plans. It provides that an IRC 403(b) program must be maintained pursuant to a written defined contribution plan, and must satisfy all of the requirements of IRC 403(b) and the Treas. Reg. in form and must operate in compliance with the form.

  2. The written plan requirement provides employers with a central location for determining benefits and administrative responsibilities under the IRC 403(b) program, and will improve the administration and coordination of the various legal requirements.

  3. Originally the written plan was to be in place by January 1, 2009, the effective date of the IRC 403(b) Treas. Regs. However, in Notice 2009-3 the IRS extended the deadline to December 31, 2009, as long as certain conditions were met. See IRM 4.72.13.7.5, Notice 2009-3 - Transitional Relief Regarding the Written Plan Requirement.

  4. A plan that did not adopt a written plan document by December 31, 2009, may still do so by complying with the procedures set forth in Rev. Proc. 2013-12. See sections 2.03, 5.02 and 6.10 of Rev. Proc. 2013-12.

  5. An IRC 403(b) written plan may incorporate other documents by reference, however, in the event of a conflict with another document, the plan governs.

4.72.13.7.1  (11-12-2014)
Written Plan Requirement

  1. The IRC 403(b) written plan requirement does not require that there must be a single plan document. Instead, the written plan may consist of multiple documents, including documents that are incorporated by reference. All of those documents, taken together, must satisfy the requirements of IRC 403(b).

  2. The IRC 403(b) written plan must contain all of the material terms and conditions for eligibility, benefits, limitations, available contracts, and the time and form of distribution in order to satisfy the written plan requirement in Treas. Reg. 1.403(b)-3(b)(3).

  3. A plan may contain certain optional features that are consistent with but not required under IRC 403(b), such as hardship withdrawal distributions and loans. If a plan contains any optional provisions, the optional provisions must also meet, in both form and operation, the relevant requirement under IRC 403(b) and the Treasury Regulations for IRC 403(b). Treas. Reg. 1.403(b)-3(b)(3).

  4. The plan may allocate responsibility for performing administrative functions, but must identify responsibility for compliance with the IRC requirements that apply on the basis of aggregated contracts for a participant (such as loan limits).

4.72.13.7.2  (11-12-2014)
Written Plan Exclusions

  1. In general, a contract will not satisfy IRC 403(b) unless it is part of a written plan that satisfies Treas. Reg. 1.403(b)-3(b)(3).

  2. However the written plan requirement does not apply to contributions by a church, unless the contributions are made to a retirement income account under IRC 403(b)(9) and Treas. Reg. 1.403(b)-3(b)(3)(iii).

  3. Section 8 of Rev. Proc. 2007-71, provides guidance on contracts to which contributions have ceased that may be excluded from the written plan requirement depending on when such contributions ceased.

    1. Contracts that stopped receiving contributions after December 31, 2004, are excluded from the written plan document requirement. Therefore, if a plan sponsor stopped making all IRC 403(b) contributions prior to December 31, 2004, the plan sponsor does not need a written plan document.

    2. Contracts issued on or between January 1, 2005, and December 31, 2008, by an issuer that does not receive contributions under the plan in a year after the contract was issued is excluded from the written plan requirement if the employer makes a good faith, reasonable effort to include the contract as part of the employer's plan by collecting available information about the issuers and notifying them of the plan administrator's name and contact information for purposes of coordinating information necessary to satisfy IRC 403(b).

    Example 5: Organization A provided employees with the opportunity to defer compensation in an IRC 403(b) arrangement. On December 30, 2004, Organization A discontinued allowing any of its employees the opportunity to defer compensation to an IRC 403(b) arrangement and instead adopted an IRC 401(k) plan. Organization A does not have to comply with the written plan requirement.

4.72.13.7.3  (11-12-2014)
Sample Plan Language

  1. Model plan language that public schools can use to comply with the written document requirement is in Rev. Proc. 2007-71.

    1. Although the model plan language in Rev. Proc. 2007-71 is directed towards public schools, other sponsors of IRC 403(b) plans may use the language in the revenue procedure as a guide when drafting their plans to the extent of the model plan language used. See Rev. Proc. 2007-71, section 5.

    2. Public schools that use the language in Rev. Proc. 2007-71 have reliance that their plan documents comply with the written plan requirement in the Treas. Regs. See Rev. Proc. 2007-71, section 4.

    Note:

    Rev. Proc. 2007-71 includes additional guidance that is applicable to all IRC 403(b) plans.

  2. The LRMs issued in conjunction with Rev. Proc. 2013-22 also include sample plan language for IRC 403(b) plans. The draft LRMs are available on the IRS web site at http://www.irs.gov/Retirement-Plans/Listing-of-Required-Modifications-(LRMs).

4.72.13.7.4  (11-12-2014)
Written Provision for Information Sharing Agreements

  1. An information sharing agreement is generally required between the employer sponsoring an IRC 403(b) plan and any vendor that is not an approved vendor (for example, a payroll slot vendor) under the plan. See Treas. Reg. 1.403(b)-10(b)(2)(i)(C).

  2. Section 8.01 of Rev. Proc. 2007-71 imposes an information sharing requirement for certain contracts that were not required to be brought under an employer’s written IRC 403(b) plan.

    1. Section 8.01 of Rev. Proc. 2007-71 provides that contracts which received contributions on or between January 1, 2005, and December 31, 2008, by an issuer that does not receive contributions under the plan in a year after the contract was issued, are not required to be part of the employer's written plan if the employer makes a reasonable, good faith effort to include those contracts as part of the employer's plan.

    2. A good faith, reasonable effort to include the contract as part of the employer's plan includes collecting available information about the issuers and notifying them of the plan administrator's name and contact information for purposes of coordinating information necessary to satisfy IRC 403(b).

    3. Section 8.01 of Rev. Proc. 2007-71 also provides that as an alternative to the actions described in b) above, a reasonable, good faith effort to include a contract as part of the employer’s plan also includes the issuer taking action before making any distribution or loan to the participant or beneficiary which constitutes a reasonable, good faith effort to contact the employer and exchange any information that may be needed in order to satisfy IRC 403(b) with the person in charge of administering the employer’s plan.

  3. If the employer’s IRC 403(b) plan allows for contract exchanges, the employer is required to enter into an information sharing agreement with the issuer of the other contract. See Treas. Reg. 1.403(b)-10(b)(2)(i)(C) and section 8.04 of Rev. Proc. 2007-71 which refer to section 6.4(d) of the model plan included in the revenue procedure. The information sharing agreement must require the employer and the vendor from time to time, to provide each other with the following:

    1. The employer must notify the vendor when the participant has had a severance from employment.

    2. The vendor must notify the employer of any hardship withdrawal if the withdrawal results in a 6-month suspension of the participant’s right to make elective deferrals under the plan.

    3. The vendor must provide information to the employer or other vendors to enable a vendor to determine the amount of any plan loan that is outstanding to the participant in order for a vendor to determine whether an additional plan loan is not a deemed distribution under IRC 72(p)(1).

    4. Information necessary in order for the resulting contract or custodial account to which contributions have been made to satisfy other tax requirements, including the following:
      (i) the amount of any plan loan that is outstanding to the participant in order for a vendor to determine whether an additional plan loan satisfies the limitation in IRC 72(p); and
      (ii) information concerning a participant’s after-tax employee contributions to allow a vendor to determine the extent to which a distribution is includible in gross income.

4.72.13.7.5  (11-12-2014)
Notice 2009-3 - Transitional Relief Regarding the Written Plan Requirement

  1. Notice 2009-3 provides transition relief during 2009 for sponsors of IRC 403(b) plans with respect to the requirement to have a written plan in place by January 1, 2009. Notice 2009-3 provides that the IRS will not treat the IRC 403(b) plan as failing to satisfy the requirements of IRC 403(b) during the 2009 calendar year provided that:

    1. A written plan that is intended to satisfy IRC 403(b) and the Treas. Reg. is adopted on or before December 31, 2009;

    2. During 2009, the plan is operated in accordance with a reasonable interpretation of IRC 403(b), taking into account the Treas. Reg., and

    3. On or before December 31, 2009, the sponsor makes its "best efforts" to retroactively correct any operational failure during the 2009 calendar year to conform to the terms of the written plan.

  2. The relief in Notice 2009-3 applies solely with respect to the 2009 calendar year and may not be relied on with respect to the operation of an IRC 403(b) plan or correction of operational defects in any prior or subsequent year.

  3. An IRC 403(b) plan sponsor that did not take the necessary actions as described in Notice 2009-3 by December 31, 2009, should be offered the opportunity to resolve the plan document qualification issue through Audit Closing Agreement procedures. See Rev. Proc. 2013-12.

4.72.13.7.6  (11-12-2014)
IRC 403(b) Remedial Amendment Period

  1. The remedial amendment period (RAP) for IRC 403(b) plans was announced in Announcement 2009-89 and modified in Rev. Proc. 2013-22. See sections 4.01(11), 4.02(3), and 21 of Rev. Proc. 2013-22.

  2. The RAP is intended to allow employers to correct plan document defects retroactive to the first day of the plan’s remedial amendment period by timely adopting an IRC 403(b) pre-approved plan or by otherwise timely amending its plan.

    1. For this purpose, the "first day of the plan’s remedial amendment period" means the later of January 1, 2010, or the effective date of the plan.

    2. For this purpose, a defect in the form of a plan is a provision, or the absence of a required provision, that causes the plan to fail to satisfy the requirements of IRC 403(b).

      Note:

      There is no RAP for failure to timely adopt an IRC 403(b) plan by December 31, 2009.

  3. The form of a plan will be treated as satisfying the Treas. Reg. as of the first day of the plan’s remedial amendment period if:

    1. On or before such day, the employer adopts a written plan that is intended to satisfy the requirements of IRC 403(b), and

    2. On or before the last day of the remedial amendment period, the employer amends the plan, including any investment arrangements and any other documents incorporated by reference into the plan, to the extent necessary to correct any form defects retroactive to the first day of the remedial amendment period.

  4. The amendment requirement under paragraph (3) b) is automatically satisfied (except to the extent any documents incorporated by reference into the plan must be amended) if the employer retroactively adopts an IRC 403(b) pre-approved plan with an opinion or advisory letter on or before the last day of the amendment period.

    1. For purposes of this section, an IRC 403(b) pre-approved plan with an opinion or advisory letter means a plan for which an opinion or advisory letter is issued pursuant to a timely filed application under section 21.04 of Rev. Proc. 2013-22, as amended by Rev. Proc. 2014-28.

  5. The IRS will announce, in subsequent guidance, the date that will be the last day of the remedial amendment period for all employers. See Section 21 of Rev. Proc. 2013-22 for additional information on the remedial amendment period for IRC 403(b) plans.

4.72.13.7.7  (11-12-2014)
Written Plan Examination Steps

  1. Request and review plan documents for compliance with the written plan requirement under IRC 403(b). See Treas. Regs. 1.403(b)-3(b).

    Note:

    If a plan incorporates other documents by reference and it is determined that there is a conflict between the written plan and another document, the plan document will govern.

  2. If the plan sponsor does not have a single written plan document, request all documents pertaining to the IRC 403(b) plan, including:

    1. Any letter issued by the IRS regarding the IRC 403(b) plan

    2. The Summary Plan Description (SPD)

    3. Annuity contracts

    4. Custodial account agreements

    5. Salary reduction agreements

    6. Employment contracts

    7. Third party administrator contracts and agreements

    8. Other communications between the plan sponsor and employees

    Note:

    It is not unusual to find that an IRC 403(b) plan sponsor does not have a separate Summary Plan Description, so ask for any written policies, procedures regarding eligibility, etc.

  3. Verify timely adoption and good faith efforts to comply by December 31, 2009, with IRC 403(b), including any changes in the applicable law and regulations.

    1. Consider whether the employer is under the remedial amendment period as outlined in Rev. Proc. 2013-22. See IRM 4.72.13.7.6.

    2. If a review of the written plan indicates that amendments are necessary, discuss whether the employer would like to adopt amendments as place holders now to prevent operational issues. If employer does not wish to make amendments then consider follow up action to insure they adopt the necessary documents as set forth in Rev. Proc. 2013–22 during the remedial amendment period. See IRM 4.72.13.7.6, IRC 403(b) Remedial Amendment Period.

  4. For years after 2009, review the written plan for compliance with any changes in the applicable law and regulations.

  5. Review information provided to employees regarding the plan and verify that it is in agreement with the plan. Any discrepancies should be noted and corrected by the plan sponsor. Information may be provided through various methods, including:

    1. The plan sponsor’s Employee Benefits Package/Handbook

    2. Emails and other communications made available by the plan sponsor related to the operation of the plan

    3. The plan sponsor’s internet site, including but not limited to, the plan sponsor’s human resources web page

      Note:

      This supports the requirement that the plan complies with the universal availability requirement of Treas. Reg. 1.403(b)-5(b)(2). See also IRM 4.72.13.14.1

  6. Verify that the annuity contracts and custodial accounts meet the language requirements and do not contradict the plan. If any conflicts exist, the plan will govern.

  7. In the case of a plan that is funded through multiple vendors, and the employer has adopted a separate document from each vendor, each vendor’s document must be reviewed for compliance and to determine if any conflicting provisions exist.

  8. For 2009 and later plan years, verify the plan operates under the terms of the plan.

    1. Consider the Self-Correction Program (SCP) and the Audit Closing Agreement Program (Audit CAP) under Rev. Proc. 2013-12 for any failures found.

4.72.13.8  (11-12-2014)
IRC 403(b) Eligibility

  1. Not all non-profit or tax-exempt organizations are eligible to maintain an IRC 403(b) plan. There are only four types of employers eligible to maintain an IRC 403(b) plan:

    1. A State, but only with respect to an employee of the State performing services for a public school.

    2. An IRC 501(c)(3) organization with respect to any employee of the IRC 501(c)(3) organization.

    3. Any employer of a minister described in IRC 414(e)(5)(A), but only with respect to the minister.

    4. A minister described in IRC 414(e)(5)(A), but only with respect to a retirement income account established for the minister. See Treas. Reg. 1.403(b)-2(b)(8).

  2. Pursuant to Treas. Reg. 1.403(b)-2(b)(8)(ii), an entity is not an eligible employer under Treas. Reg. 1.403(b)-2(b)(8)(i) if it treats itself as not being a State for any other purpose of the Internal Revenue Code, and a subsidiary or other affiliate of an eligible employer is not an eligible employer under Treas. Reg. 1.403(b)-2(b)(8)(i) if the subsidiary or other affiliate is not an entity described in Treas. Reg. 1.403(b)-2(b)(8)(i).

  3. Some key issues to look at when considering eligibility are whether:

    1. The employer is eligible to maintain an IRC 403(b) plan for participating employees.

    2. Participants in the IRC 403(b) plan perform services for the employer as employees.

    3. Self-employed ministers and certain other ministers satisfy the requirements of IRC 414(e)(5)(A).

  4. If an ineligible employer maintains a plan intended to be an IRC 403(b) plan, the plan is not an IRC 403(b) plan.

    Note:

    For resulting tax consequences, see IRC 403(c) and IRC 72.

  5. Issues involving an ineligible employer may be resolved through Audit CAP in a manner that limits or prevents unfavorable tax treatment. See Rev. Proc. 2013-12 section 6.03.

4.72.13.8.1  (11-12-2014)
Public Schools

  1. One type of employer that may sponsor an IRC 403(b) plan is a public school.

  2. To be a public school, the organization must be a State-sponsored educational organization described in IRC 170(b)(1)(A)(ii) which relates to educational organizations that normally maintain a regular faculty and curriculum, and normally have a regularly enrolled body of students in attendance at the place where it regularly carries on educational activities. See Treas. Reg. 1.403(b)-2(b)(14).

  3. Included in this category are:

    1. K-12 public schools

    2. State colleges

    3. State universities

  4. Both non-academic staff (e.g., a custodial employee) and faculty may be covered.

  5. Elected or appointed officials holding positions are not eligible unless the office held requires experience or training in the field of education (e.g., a member of the school board, university regent or trustee may not be eligible). See Treas. Reg. 1.403(b)-2(b)(10).

    Example 6:Public High School Y maintains an IRC 403(b) plan for its employees. Employee A is employed by Public High School Y and performs timekeeping and payroll services for Public High School Y. Employee A may participate because Employee A performs services for a public school. In contrast see Rev. Rul. 72-390.

    Example 7: Employee B, a state employee, provides in-home teaching services. Employee B may be covered by an IRC 403(b) plan maintained by Employee B's employer because Employee B performs services for a public school.

4.72.13.8.2  (11-12-2014)
501(c)(3) Organizations

  1. Another type of eligible employer is an organization described in IRC 501(c)(3) and exempt from federal income tax under IRC 501(a).

  2. An IRC 501(c)(3) organization is defined generally as one organized and operated exclusively for the following purposes:

    1. Religious

    2. Charitable

    3. Scientific

    4. Public safety testing

    5. Literary or educational

    6. To encourage national or international amateur sports competition

    7. For the prevention of cruelty to children or animals

  3. IRC 501(c)(3) organizations may include:

    1. Charities

    2. Social welfare agencies

    3. Private hospitals

    4. Health care organizations

    5. Private schools

    6. Religious institutions

    7. Research facilities

  4. In order to be recognized as an IRC 501(c)(3) organization, all organizations except churches and certain church-related organizations, and other organizations excepted under IRC 508, must apply to the IRS for a determination letter by filing Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. See Pub 557, Tax-Exempt Status of Your Organization.

4.72.13.8.3  (11-12-2014)
Indian Tribal Governments

  1. A designated Indian Tribal Government is treated as a State for purposes of IRC 403(b), so an educational organization associated with a tribal government is eligible to maintain an IRC 403(b) plan as long as it is a public school as defined in IRC 170(b)(1)(A)(ii). See Treas. Reg. 1.403(b)-2(b)(20).

  2. In addition, an Indian Tribal Government, a subdivision, agency or instrumentality of an Indian Tribal Government, or a corporation chartered under federal, state, or tribal law which is owned in whole or in part by any of the foregoing is treated as an employer described in IRC 501(c)(3) with respect to any annuity contract purchased in a plan year beginning before January 1, 1995. See section 1450(b) of the Small Business Job Protection Act of 1996 and Treas. Reg. 1.403(b)-2(b)(20).

4.72.13.8.4  (11-12-2014)
Ministers Described in IRC 414(e)(5)(A)

  1. A self-employed minister may deduct, within the limits of IRC 404(a)(10), contributions to a retirement income account described in IRC 403(b)(9). See Treas. Reg. 1.403(b)-2(b)(8)(i)(D).

  2. Similar deductions may be taken by a minister employed by a non-501(c)(3) organization with which the minister shares common religious bonds. Contributions to an IRC 403(b) plan are not includible in the gross income of the minister. See IRC 414(e)(5)(E) .

4.72.13.8.5  (11-12-2014)
Eligible Employees

  1. An IRC 403(b) plan can only cover the employees of an eligible employer (with the exception of ministers described in IRC 414(e)(5)(A)). See Treas. Reg. 1.403(b)-2(b)(8)(i)(D).

  2. Employee status under IRC 403(b) is generally determined by employee status for federal employment tax purposes under common law principles.

  3. "Employee" means a common-law employee performing services for the employer, and does not include a former employee or an independent contractor. See Treas. Reg. 1.403(b)-(2)(b)(9).

    Note:

    But see Treas. Reg. 1.403(b)-4(d) for special 5-year rule for nonelective employer contributions for former employees.

    1. Whether an individual is a common law employee or independent contractor is most likely to arise with professionals such as physicians. See Rev. Rul. 87-41.

    2. FSLG or EO has the authority to determine the employee status. A referral should be made through the Specialist Referral System (SRS) to request assistance.

    3. To utilize SRS, search on the IRS intranet home page for the Specialist Referral System, or go to http://lmsb.irs.gov/hq/fs/InformationResources/srs/FS_referral.asp.

4.72.13.8.6  (11-12-2014)
Eligibility - Examination Steps

  1. Determine if the sponsoring employer is an "eligible employer " as defined in Treas. Reg. 1.403(b)-(2)(b)(8).

  2. If the employer indicates that it is a public school, confirm that it meets the requirements of Treas. Reg. 1.403(b)-(2)(b)(14) and IRC 170(b)(1)(A)(ii).

  3. If the employer holds itself out to be an IRC 501(c)(3) organization, its status can be verified by:

    1. Requesting a copy of any determination letter issued by the IRS regarding the organization’s tax exempt status under IRC 501(a) and whether the entity is an IRC 501(c)(3) organization.

    2. Information may be obtained through the Integrated Data Retrieval System (IDRS). Review the INOLES; subsection code “03” and status code “01” indicate that the organization is currently an IRC 501(c)(3) organization. Review the BMFOLO; it will provide the date the ruling regarding IRC 501(c)(3) status was made by the IRS.

    3. "Exempt Organizations Select Check" is an on-line search tool that allows users to select an exempt organization and check certain information about its federal tax status and filings. The link can be accessed by entering Exempt Organizations Select Check in the Search box on www.irs.gov.

    4. Guide Star®, provides a searchable database of IRC 501(c)(3) charitable organizations, including online copies of Forms 990, Forms 990-EZ and Forms 990-PF and other information. The link is: www.guidestar.org.

    5. Foundation Center is another source that can be used to find information about exempt organizations. The link is: www.foundationcenter.org.

    6. Prior to October 9, 1969, organizations may claim to be tax-exempt under IRC 501(c)(3) without having to obtain IRS recognition by filing Form 1023 and receiving a determination letter. Of course, that status is subject to challenge on examination by the Exempt Organizations division. The organization cannot be a State, political subdivision or integral part. See Rev. Rul. 60-384; 1960-2 C.B. 172. A referral to the Exempt Organizations division may be necessary for them to make a determination of the employer’s status.

  4. If an IRC 403(b) plan examination is conducted in connection with an Exempt Organizations audit, a loss of IRC 501(c)(3) status will automatically cause the plan to fail the requirements of IRC 403(b) for any plan year during which the employer was not eligible. Under such circumstances, consider a closing agreement under Rev. Proc 2013-12.

  5. If the IRC 403(b) plan examination is not initiated by the Exempt Organizations division, any question regarding the IRC 501(c)(3) status of the employer must be referred to Exempt Organizations by the Employee Plans agent.

    1. The Specialist Referral System (SRS) should be used to request assistance from EO or to make a referral.

    2. To utilize SRS, go to https://srs.web.irs.gov.

  6. Only employees of eligible employers may participate in an IRC 403(b) plan. Independent contractors may not be allowed to participate.

    Note:

    An IRC 403(b) plan document may allow non-elective employer contributions for former employees for up to five years after the severance of employment under Treas. Reg. 1.403(b)-4(d)(1).

4.72.13.9  (11-12-2014)
Funding Vehicles

  1. Amounts contributed to an IRC 403(b) plan may only be invested in certain funding vehicles. Funding vehicles refer to the type of investment arrangement for the assets of the plan. See Treas. Reg. 1.403(b)-8.

  2. The funding vehicles for IRC 403(b) plans are generally limited to any of the following:

    1. Annuity contracts

    2. Custodial accounts for regulated investment company stock

    3. Retirement income accounts for a church, a convention or association of churches, or an organization described in IRC 414(e)(3)(A)

    4. Any combination of these

      Note:

      See Treas. Reg. 1.403(b)-8(a).

  3. Custodial accounts and retirement income accounts are treated as annuity contracts for purposes of the IRC 403(b). Thus, custodial accounts and retirement income accounts are generally subject to the rules applicable to IRC 403(b) annuity contracts (in addition to their own special requirements). Treas. Reg. 1.403(b)-8(d)&(e).

  4. Contributions to an IRC 403(b) plan must be transferred to the insurance company issuing the annuity contract (or the entity holding assets of any custodial or retirement income account that is treated as an annuity contract) within a period that is not longer than is reasonable for the proper administration of the plan. This requirement is generally satisfied if IRC 403(b) elective deferrals are contributed within 15 business days following the month in which these amounts would have otherwise been paid to the participant. See Treas. Reg. 1.403(b)-8(b).

    Note:

    For plans that are subject to ERISA, contributions must be transferred pursuant to the applicable rules under ERISA.

  5. Under IRC 403(b)(5), for any taxable year in which two or more annuity contracts are purchased by the employer for the employee, such contracts will be treated as one contract. See Treas. Reg. 1.403(b)-3(b)(1).

    Note:

    Failure to aggregate contracts will result in the loss of IRC 403(b) status of the annuity contracts.

  6. Under IRC 403(b)(1)(E), a contract purchased by an employer must comply with the requirements of IRC 401(a)(30) which states that the amount of elective deferrals under the plan of the employer must not exceed the limit under IRC 402(g). Thus, in order to be a valid contract under IRC 403(b), the contract by its terms must preclude the making of excess deferrals and must reflect the IRC 402(g) limit.

    Note:

    IRC 402A(a)(1) provides that designated Roth contributions are treated as elective deferrals, except that they are not excludable from gross income.

4.72.13.9.1  (11-12-2014)
Annuity Contracts

  1. The most common type of funding vehicle for an IRC 403(b) plan is an annuity contract under IRC 403(b)(1).

    1. The annuity contract may be offered only by an insurance company.

    2. The annuity contract may be owned by the individual, or in the case of a group annuity contract, by the employer.

    3. The annuity may be either variable or guaranteed.

  2. Regulations extend the non-transferability requirement of IRC 401(g) to IRC 403(b) annuity contracts. Thus, an IRC 403(b) annuity contract must provide that it is nontransferable. See Treas. Reg. 1.403(b)-3(a)(5).

    1. Loans may be made from an annuity contract and amounts held under the contract may be transferred or rolled over to another IRC 403(b) plan under certain conditions.

    2. Contributions other than after tax employee contributions and rollover contributions to an annuity contract and their earnings are subject to certain early distribution restrictions to ensure that they are used for retirement purposes.

    3. Excess contributions to an annuity contract are not subject to the excise tax under IRC 4973.

    4. Life insurance contracts (as defined in IRC 7702), endowment contracts, health or accident insurance contracts, property insurance contracts, casualty insurance contracts, and liability insurance contracts do not meet the definition of an annuity contract. See Treas. Reg. 1.403(b)-8(c)(2).

  3. An annuity contract may provide life insurance protection as long as the death benefit is merely incidental to the primary purpose of providing retirement benefits. The rules for determining whether life insurance is incidental in IRC 401(a) plans also apply to IRC 403(b) plans. See Treas. Reg. 1.403(b)-8(c)(2).

    1. Life insurance is incidental if less than 50 percent of total employer contributions made on behalf of a participant are used to purchase an ordinary life insurance contract, or in the case of term or universal life insurance, no more than 25 percent of total contributions are used to purchase the life insurance contract.

    2. As in IRC 401(a) plans, the portion of each year's premium representing the cost of life insurance protection (referred to as PS-58 costs) is includible in gross income and counts toward the employee's basis in the annuity contract on distribution.

    3. In addition, a contract on a participant's life must be converted to cash or an annuity or distributed to the participant at retirement. See Rev. Rul. 60-84, 1960-1 C.B. 159; Rev. Rul. 66-143, 1966-1 C.B. 79 and Rev. Rul. 68-31, 1968-1 C.B. 151.

  4. The annuity contract must comply with the terms of the written plan, if subject to the written plan requirement. See IRM 4.72.13.7.1.

  5. If a plan is structured so that contributions are placed in an employer's savings account to purchase annuity contracts for employees at retirement, the plan is not an IRC 403(b) plan. See Rev. Rul. 68-87, 1968-2 C.B. 187.

    Example 8: ABC Foundation, an IRC 501(c)(3) organization, maintains an annuity plan intended to be an IRC 403(b) plan. Foundation makes both elective deferrals and employer contributions that are not elective deferrals to individual investment accounts (not mutual funds) for each of its employees. Foundation purchases annuity contracts for employees at their retirement. The arrangement is not an IRC 403(b) plan.

    Example 9: Employer A is a public education organization maintaining a plan intended to be an IRC 403(b) plan (Plan). All contributions under the Plan are invested in life insurance policies for its employees. Because life insurance must be incidental to the primary purpose of providing retirement benefits, the Plan is not an IRC 403(b) plan.

4.72.13.9.2  (11-12-2014)
Custodial Accounts

  1. A custodial account under IRC 403(b)(7) is treated as an annuity contract and must satisfy the various requirements of IRC 403(b). See IRC 403(b)(7) and Treas. Reg. 1.403(b)-8(d)(i).

  2. The assets of a custodial account must be held by a bank or an approved non-bank trustee or custodian under IRC 401(f)(2). See Treas. Reg. 1.403(b)-8(d)(2).

  3. The assets of a custodial account must be invested exclusively in regulated investment company stock (i.e., mutual funds) and consequently, a custodial account may not provide life insurance. Treas. Reg. 1.403(b)-8(d)(2)(i).

  4. The distribution restrictions of IRC 403(b)(7) must be met with respect to amounts held in the custodial account. See Treas. Reg. 1.403(b)-6(c).

  5. The assets are used only for the exclusive benefit of plan participants or their beneficiaries. See Treas. Reg. 1.403(b)-8(d)(2)(iii).

    Note:

    For this purpose, assets are treated as impermissibly diverted to the employer if the employer borrows assets from the account.

  6. If the custodial account is part of a retirement income account, it is not treated as a custodial account. See Treas. Reg. 1.403(b)-8(d)(2)(iv).

  7. A custodial account may permit loans to participants. See Treas. Reg. 1.403(b)-6(f).

  8. Unlike contributions to annuity contracts, excess contributions to a custodial account are subject to the excise tax under IRC 4973. See IRC 4973(a)(3).

  9. The custodial account must comply with the terms of the written plan. See IRM 4.72.13.7.1.

4.72.13.9.3  (11-12-2014)
Retirement Income Accounts

  1. Retirement income accounts are generally subject to the rules and requirements of annuity contracts. See Treas. Reg. 1.403(b)-9(a).

  2. The funding vehicles for retirement income accounts can be varied. See Treas. Reg. 1.403(b)-9(a)(2).

  3. A retirement income account is defined under IRC 403(b)(9) as a defined contribution program established or maintained by a church or church-related organization. See Treas. Reg. 1.403(b)-2(b)(5), (6), and (15); 1.403(b)-9(a)(2).

    Note:

    A church-related organization has a special definition under the regulations.

    1. The retirement income account’s interest in the underlying assets must be accounted for separately. See Treas. Reg. 1.403(b)-9(a)(2)(i)(A).

    2. Investment performance must be based on gains and losses on those assets. See Treas. Reg. 1.403(b)-9(a)(2)(i)(B).

    3. The assets held in the account must be used for the exclusive benefit of plan participants or their beneficiaries. For this purpose, assets are treated as impermissibly diverted to the employer if there is a loan or other extension of credit from assets in the account to the employer. See Treas. Reg. 1.403(b)-9(a)(2)(i)(C).

  4. A retirement income account must be maintained pursuant to a written plan, which must state the intent to constitute a retirement income account. See Treas. Reg. 1.403(b)-9(a)(2)(ii).

  5. Any asset of a retirement income account that is owned or used by a participant or beneficiary is treated as having been distributed to that participant or beneficiary. See Treas. Reg. 1.403(b)-9(a)(3).

  6. A retirement income account is not a custodial account (as defined in Treas. Reg. 1.403(b)-8(d)(2)), even if it is only invested in regulated investment company stock. See Treas. Reg. 1.403(b)-9(a)(4). The distribution rules of IRC 403(b)(11) would apply rather than IRC 403(b)(7). See Treas. Reg. 1.403(b)-6(d).

  7. A retirement income account may distribute benefits in a form that includes a life annuity only if:

    1. The amount of the distribution has an actuarial present value at the annuity starting date that is equal to the participant’s or beneficiary’s accumulated benefit, based on reasonable actuarial assumptions, including interest and mortality, and

    2. The plan sponsor guarantees benefits in the event that a payment is due that exceeds the participant’s or beneficiary’s accumulated benefit. See Treas. Reg. 1.403(b)-9(a)(5).

  8. A retirement income account may take the form of a defined benefit plan if it is grandfathered. A defined benefit plan which is established by a church or a convention or association of churches and is in effect on September 3, 1982, is not treated as failing to satisfy the requirements of IRC 403(b) merely because it is a defined benefit arrangement. See section 251(e)(5) of Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and Treas. Reg. 1.403(b)-10(f).

4.72.13.9.4  (11-12-2014)
Funding Vehicles - Examination Steps

  1. Review the plan document(s) and the funding vehicles under the plan. See Treas. Reg. 1.403(b)-3(b)(3).

  2. Review and document whether custodial account documents and annuity contracts contain the language required under Treas. Reg. 1.403(b)-8(c) & (d).

  3. Verify that the language in the custodial account or annuity contract agrees with the terms of the plan document. The Plan controls if any conflicts exist.

  4. Request and review any third party administrator contracts and agreements.

  5. Request and review any Information Sharing Agreements with vendors that were formerly used for funding vehicles under the plan.

  6. Inquire about any contracts issued subject to good faith requirements of section 8.02 of Rev. Proc. 2007-71.

4.72.13.10  (11-12-2014)
Elective Deferral Contributions

  1. IRC 403(b) plans are usually funded in whole or in part through elective deferral contributions under a salary reduction agreement. The requirements for elective deferrals and contributions other than elective deferrals differs under IRC 403(b). This subsection focuses on requirements applicable only to elective deferral contributions.

  2. Elective deferrals are contributions made by an employer as a result of a salary reduction agreement with an employee to take a reduction in salary or forego an increase in salary, bonuses or other wages.

  3. An IRC 403(b) plan is neither required to permit, nor precluded from permitting, an employee to make multiple salary reduction agreements in a single taxable year. However, see the effective opportunity requirement of universal availability under Treas. Reg. 1.403(b)-5(b)(2).

  4. An IRC 403(b) salary reduction agreement applies to compensation that is not yet paid or currently available to the employee at the effective date of the agreement.

  5. The salary reduction agreement must be legally binding.

  6. Amounts subject to a salary reduction agreement must be in the nature of compensation.

  7. Elective deferrals are generally treated as employer contributions (for purposes of IRC 403(b), IRC 402(g) and IRC 415) but are treated as employee contributions for other purposes, including FICA.

  8. Elective deferrals under an IRC 403(b) plan are also subject to specific requirements such as:

    1. Annual contribution limits (See IRM 4.72.13.11, Contribution Limitations)

    2. Nondiscrimination rules (universal availability) (See IRM 4.72.13.14, Nondiscrimination and Coverage)

    3. Withdrawal restrictions (See IRM 4.72.13.15, Distribution Requirements)

4.72.13.10.1  (11-12-2014)
Elective Deferrals - Examination Steps

  1. Review the plan provisions regarding elective deferrals (including any Roth provisons).

  2. Determine whether contributions are elective deferrals, and closely analyze one-time irrevocable and condition of employment contributions and to verify they are not considered elective deferrals subject to IRC 402(g). See IRM 4.72.12.11.1.

  3. Request deposit reconciliations from the vendors.

  4. Sample and reconcile amounts shown on W-2s to vendor deposits:

    1. Verify that only elective deferrals are shown in Box 12 of Form W-2.

    2. IRC 414(h) pick-up contributions may be shown in Box 14 of Form W-2 but are not required to be shown there. See Rev. Rul. 2006-43, Rev. Rul. 77-462, Rev. Rul. 81-25, Rev. Rul. 82-36 and Rev. Rul. 87.10 for additional reporting information.

    3. Discrepancies should be explained, and if significant, investigated further.

  5. Sample and review deferral agreements to ensure timeliness of execution and the type of compensation to be deferred. Determine whether the agreement applies to amounts not currently available to the employee at the time the agreement is effective.

    Note:

    Separate agreements may be necessary for some forms of compensation, such as unused sick or vacation pay.

  6. Verify that election forms properly limit elective deferrals to the IRC 402(g) limit.

  7. Verify that elective deferrals are limited to the IRC 402(g) limit.

4.72.13.11  (11-12-2014)
Contribution Limitations

  1. There are two separate limitations on the amount of contributions to an IRC 403(b) plan that are excludable from gross income. See IRC 402(g) and IRC 415.

  2. IRC 402(g) imposes a limit on the annual dollar amount of elective deferrals made by a participant during the year.

  3. All elective deferrals made by a participant to a Simplified Employee Pension (SEP), cash or deferred arrangement (CODA), IRC 403(b) plan, and Savings Incentive Match Plan for Employees (SIMPLE) plan are aggregated in applying the limit. The limit is designed to restrict the total amount that may be deferred by a participant on a salary reduction basis.

  4. IRC 415 places an overall limit on the amount of elective deferrals and contributions other than elective deferrals that may be made annually on an employee's behalf to an IRC 403(b) plan during a single limitation year. IRC 415 imposes a limit of the lesser of $52,000 for 2014 or 100% of includible compensation on the maximum amount that may be contributed to an IRC 403(b) plan for the year.

  5. Under IRC 414(u), contributions by an employer or employee pursuant to veterans' re-employment rights under USERRA, are not treated as contributions made in the year the contributions are made, but in the year to which they relate, for purposes of IRC 402(g) and IRC 415.

  6. Under IRC 414(v), contributions made pursuant to the age 50 catch-up election are not treated as contributions for the purposes of IRC 415.


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