|Mistake||Find the Mistake||Fix the Mistake||Avoid the Mistake|
|3) You didn’t follow the terms of your 403(b) written plan.||Compare your written plan to its operation.||
You may retroactively:
|Convey any changes made to your written plan or to the operation of your 403(b) plan to your plan service providers.|
Plan sponsors are responsible for keeping their plan in compliance with the tax laws; however, there may be many employees, vendors and tax professionals servicing your plan. You should convey any changes made to your plan document or to your plan’s operation to everyone providing service to your plan. For example, if you amend your plan document to change the definition of compensation, you should communicate that change to everyone involved in determining deferral amounts withheld from the participants' pay, performing your plan’s nondiscrimination tests or allocating employer contributions. Also, if you decide to use a different definition of compensation in operation, make sure you amend the plan timely to reflect that change.
How to find the mistake:
This mistake only applies beginning in 2009. For 2008 and earlier years, there was no IRS requirement that a 403(b) plan be operated according to a written plan. Beginning with 2009, compare the plan’s operation to the written 403(b) plan your organization has adopted. You should conduct a review annually to ensure that the written 403(b) plan is consistent with the 403(b) plan’s operation.
Does the operation of your 403(b) plan conform to its written plan?
- If your plan or plan vendors allow for loans or hardships, the written 403(b) plan must provide for those programs in addition to explaining their administration.
- If your plan or plan vendors allow for any catch-up contributions, the written 403(b) plan must allow for these.
- Any other optional provisions that your plan is using must be included in the written 403(b) plan.
- Plan benefits must be computed properly and provided to plan participants as specified by the written 403(b) plan terms.
How to fix the mistake:
Beginning in 2009, if you aren’t operating your 403(b) plan consistently with its written plan there are several steps you may take to fix it. You can only resolve this failure under Revenue Procedure 2018-52 and the correction only applies to 2009 and subsequent plan years.
Public School Y adopted a written plan by December 31, 2009. The plan has 300 participants. The total current value of annuity contracts, and or, custodial accounts associated with the plan is over ten million dollars. In 2018, Y’s 403(b) administrator realized that it had made participant loans and hardship distributions during the year even though loans and hardship distributions weren't included in Y’s written 403(b) plan.
Organization X, a 501(c)(3) organization, has a written 403(b) plan with 98 participants. The total current value of annuity contracts, and or, custodial accounts associated with the plan is over $500,000 but less than ten million dollars. The written plan, which X adopted by December 31, 2009, stated it would provide matching contributions to all participants who made employee elective deferrals. In 2019, Organization X’s 403(b) plan administrator realized that six eligible plan participants hadn't received any matching contributions in the 2017 plan year and in the first half of 2018.
Correction programs available:
If Y determines that it had proper practices and procedures in place, it may correct using SCP, by retroactively adopting plan amendments that match the written 403(b) plan to the plan’s prior operation. This correction through plan amendment is one of the few plan amendment corrections permitted through SCP (per Revenue Procedure 2018-52 section 4.05 and Appendix B section 2.07).
If X determines that it had proper practices and procedures in place, it may correct using SCP. X must make a corrective contribution equal to the matching contributions that it should have provided to the six participants for 2017 and part of 2018, adjusted for earnings through the date of correction. Correction by retroactive plan amendment to match the written plan to the plan’s operation wouldn’t be allowed under SCP, although VCP or Audit CAP may provide more flexible options.
In examples 1 and 2, there may be a time limit as to when correction has to occur if the qualification failure is deemed to be significant. See sections 8 and 9 of Revenue Procedure 2018-52. This qualification failure couldn’t exist under EPCRS prior to 2009 since the written plan requirement and the failure to follow its terms didn’t apply in pre-2009 years. However, certain nongovernmental 403(b) plan sponsors may have an obligation under other federal laws, such as ERISA.
Voluntary Correction Program (VCP):
Y may correct using VCP if Y (or the plan) is not under audit. Correction would be the same as under SCP. Y is encouraged to make its VCP submission using the model documents in Form 14568, Model VCP Compliance Statement, including Form 14568-I, Model VCP Compliance Statement - Schedule 9: Limited Safe Harbor Correction by Plan Amendment, when preparing the submission. The user fee for the VCP submission made in 2019 (based on the amount of assets associated with the 403(b) plan) is $3,500.
Organization X may correct using VCP if neither they nor the plan is under audit. Correction would be the same as under SCP. Organization X can make its VCP submission using Form 14568, Model VCP Compliance Statement. The user fee for the VCP (based on the amount of assets associated with the 403(b) plan) is $3,000 if made in 2019. VCP user fees may change in subsequent years.
Audit Closing Agreement Program:
Under Audit CAP, correction of this mistake is the same as described under SCP. The plan sponsor and the IRS enter into a closing agreement outlining the corrective action and negotiate a sanction that is not excessive, considers facts and circumstances; bear a reasonable relationship to the nature, extent and severity of the failures, based upon all relevant factors described in section 14 of Rev. Proc. 2018-52.
How to avoid the mistake:
Tell everyone that provides service to your plan of any changes made to your written plan or its operation. For example, if you want your 403(b) plan to allow for hardship distributions, you must revise your written 403(b) plan to allow for them prior to making one. You should communicate the change to all people involved in making a hardship determination. Communication among the people who service your plan is essential for a compliant plan. Below are some common changes that may lead to potential mistakes:
- If you made any changes to your written program, you should inform all people who service your plan of those changes and what they mean to the plan operation.
- If you amend your written program, you should summarize and communicate those changes to the plan participants.
- If you’ve changed the way you operate the 403(b) plan, you should communicate those changes to your plan service providers. You may also need to make changes in your written program to reflect those changes.