If your organization lost its tax-exempt status, it's no longer eligible to sponsor a 403(b) plan. You:
- must stop employer and employee contributions to your 403(b) plan,
- may apply for restoration of your organization's tax-exempt status, and
- should correct your eligibility failure through the IRS Voluntary Correction Program (VCP) if you allowed contributions to be made to the 403(b) plan after your organization lost its tax-exempt status.
Common reasons for loss of tax-exempt status
A 501(c)(3) tax-exempt organization may become ineligible to sponsor a 403(b) plan if it loses its tax-exempt status because:
- it's been automatically revoked for not filing an annual Form 990 series information return for three consecutive years, or
- the IRS otherwise revokes or terminates its status.
In addition, a public educational system may no longer qualify as a public educational organization because of a reorganization or some other event.
Reinstatement of tax-exempt status if automatically revoked
Your organization can apply to the IRS for a reinstatement of its tax-exempt status only if it's been automatically revoked for failing to file Forms 990 in three consecutive years. If the IRS reinstates your tax-exempt status prospectively, but not retroactively, you should make a VCP submission if any type of contributions were made to the 403(b) plan after the organization lost its exempt status. If the IRS retroactively reinstates your tax-exempt status, you don't need to make a VCP submission.
Consequences of plan sponsor ineligibility
If your organization is no longer eligible to sponsor a 403(b) plan and you don't discontinue contributions:
- your organization may have to withhold and pay payroll taxes from the contributions, and
- plan participants may be liable for additional income tax because the contributions aren't tax-deferred.
To avoid these consequences, you can use the IRS Voluntary Correction Program under Revenue Procedure 2019-19.
Eligibility and conditions for using VCP - you can use VCP to protect the tax-favored status of the contributions made during the time you've lost your exempt status if:
- your organization or 403(b) plan isn't "under examination" by the IRS (Revenue Procedure 2019-19, Section 5.08);
- you've determined or received notice from the IRS that your organization's 501(c)(3) exempt status won't be reinstated, or you decided not to apply for reinstatement of your organization's 501(c)(3) tax-exempt status;
- you've stopped making salary reduction and employer contributions to the 403(b) plan. Be sure you've complied with all other 403(b) plan rules, including the written plan requirement, universal availability, 403(b) distribution rules and any other requirement under IRC section 403(b) (Revenue Procedure 2019-19, Section 6.03); and
- you've ensured that the 403(b) contributions made after the organization's lost exemption remain in the issued annuity contracts, or custodial accounts and aren't distributed before one of the applicable distribution events in IRC Section 403(b).
Benefits - making a VCP submission benefits your organization and your 403(b) plan participants because:
- all contributions to the plan after your organization became an ineligible employer can remain in the 403(b) annuities or custodial accounts,
- participants' accounts retain their tax favored status, and
- your organization avoids penalties.
Make a VCP submission
Prepare and collect VCP submission documents
Include these items in your VCP submission:
- Form 14568, Model VCP Submission Compliance Statement (PDF). This form is a model compliance statement. Use attachments to explain the failure, how you'll correct it, and what steps you'll take to make certain the error will not occur again.
- Narrative attachments that go with Form 14568 that describe the failure you are trying to fix, along with the correction method being used to fix it and any changes to administrative procedures to prevent future failures.
- A copy of the signed and dated written 403(b) plan your organization adopted to comply with the final 403(b) income tax regulations.
- Required statements for submissions involving 403(b) plans that are signed and dated that include the following items:
- The Plan Sponsor is a "(Enter the type of employer. For example, "local public school district", "public university", or "charitable organization exempt from tax under Section 501(c)(3)")
- The Plan Sponsor has contacted all other entities involved with the plan and has been assured of their cooperation to the extent necessary to implement the correction described in this VCP submission."
- Include the plan sponsor's name, the plan number, and the sponsor's EIN at the top of the page that includes the statements.
- If applicable Form 2848, Power of Attorney and Declaration of Representative (PDF) (Instructions to Form 2848 (PDF)) or Form 8821, Tax Information Authorization (PDF). See additional details below
- All completed documents will have to be converted to PDF documents.
- Combine all documents in this list into a single PDF file. If combined file exceeds 15MB, remove some documents so that it does not exceed this limit. The documents that could not be included in the combined PDF file can be faxed to the IRS using 855-203-6996. See Revenue Procedure 2019-19, Section 11.03(7).
Make your VCP submission via Pay.gov
- Go to www.pay.gov and create an account.
- After signing in, search for Form 8950, Application for Voluntary Correction Program.
- Click on the link that will take you to the pay.gov version of Form 8950.
- Follow the Form 8950 Instructions (PDF) on pay.gov.
- Upload the VCP submission documents and pay the applicable user fee.
- Beginning April 1, 2019, paper VCP submissions can't be sent to the IRS.
Important Form 14568 attachment filing reminders
- Write your employer identification number, plan name and number on each attachment.
- Section II attachment - explain how your organization lost its exempt status, and state each year your organization wasn't eligible to sponsor a 403(b) plan, and the amount of contributions that were paid to the plan during each of these years.
- Section III attachment - describe your proposed correction method. (Part of your correction must involve stopping all contributions from going into the 403(b) plan no later than the date you make your VCP submission.) In addition, your correction must indicate that the ineligible contributions will remain within the 403(b) annuity contracts or custodial accounts as discussed above.
- Section IV attachment - state your proposed methods to locate and notify former employees or beneficiaries (or include a statement that the failure didn't affect and the correction won't affect any former employees).
- Section V attachment - explain what changes you'll make to your administrative procedures so that this failure won't happen again.
- Include a separate attachment indicating the type of organization the plan sponsor is now or was previously and a statement that the organization has contacted all entities involved with the plan and has their cooperation to make the correction.