Are You a 403(b) Plan Sponsor That Has Lost Your Tax-Exempt Status?

 

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 2021-30 PDF.

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 2021-30 PDF, 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,
  • 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).

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 2021-30, Section 6.03).

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:

  1. Form 14568, Model VCP Submission Compliance Statement PDF 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 sure the error won’t occur again.
     
  2. Narrative attachments to Form 14568 that describe the failure you are trying to fix and the correction method being used to fix it, as well as any changes to administrative procedures to prevent future failures.
     
  3. A copy of the signed and dated written 403(b) plan your organization adopted to comply with the final 403(b) income tax regulations.
     
  4. Required statements for submissions involving 403(b) plans that are signed and dated and include:
    • a statement describing the plan sponsor’s employer type. For example, “The plan sponsor is a ______”. Be sure to enter the correct type, such as “local public school district,” “public university,” or “charitable organization exempt from tax under Section 501(c)(3).”
    • A statement  that 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.
    • the plan sponsor's name, plan number, and EIN at the top of the page that includes the statements.
       
  5. 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 2021-30, Section 11.03(7).

Make your VCP submission via Pay.gov

  1. Go to www.pay.gov and create an account.
  2. After signing in, search for Form 8950, Application for Voluntary Correction Program.
  3. Click on the link that will take you to the pay.gov version of Form 8950.
  4. Follow the Form 8950 Instructions PDF on pay.gov.
  5. Upload the VCP submission documents and pay the applicable user fee.

Important Form 14568 attachment filing reminders

  • Type your employer identification number, plan name and number on each attachment.
  • Section II attachment - explain how your organization lost its exempt status. Also, 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. As part of your correction, you must stop all contributions to the 403(b) plan by the date you make your VCP submission. Your correction must also show that the ineligible contributions will stay in the 403(b) annuity contracts or custodial accounts as discussed above.
  • Section IV attachment - discuss your plan to locate and notify former employees or beneficiaries, if applicable. Alternatively, you can 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 that states the type of organization the plan sponsor is (or was) as well as a statement that the organization has contacted all entities involved with the plan and has their cooperation to make the correction.