If your organization was never eligible to sponsor its 403(b) retirement plan, use the IRS Employee Plans Compliance Resolution System’s Voluntary Correction Program (VCP) to resolve this failure.
Who may sponsor a 403(b) plan?
“Eligible employers” that may sponsor a 403(b) plan are:
- 501(c)(3) tax-exempt organizations,
- public education organizations (Internal Revenue Code Section 170(b)(1)(A)(ii)),
- ministers (defined by IRC Section 414(e)(5)(A)), and
- a state, including a political subdivision of a state, or any agency or instrumentality of a state for its public school employees (IRC Section 170(b)(1)(A)(ii)). (An Indian tribal government is treated as a state (IRC Section 7871(a)(6)(B)).
- Treas. Reg. Section 1.403(b)-2 for details about employers eligible to sponsor 403(b) plans.
- "Are you a 403(b) plan sponsor that has lost your tax-exempt status?” if you’ve become ineligible because you lost your tax-exempt status.
Consequences of an ineligible employer adopting a 403(b) plan
If your organization was never eligible to sponsor a 403(b) plan and you don’t submit this error under the VCP:
- your organization has to withhold and pay payroll taxes from the contributions to the plan, and
- plan participants are liable for additional income tax because the contributions aren’t tax-deferred.
Voluntary Correction Program
Eligibility - you can use VCP if:
- your organization or 403(b) plan is not “under examination” by the IRS (see Revenue Procedure 2013-12 Section 5.09), and
- you immediately stop 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 Internal Revenue Code section 403(b) (Revenue Procedure 2013-12 Section 6.03).
- you keep the 403(b) assets in the issued annuity contracts or custodial accounts and don’t distribute them before one of the distributable events in IRC Section 403(b).
Benefits - making a VCP submission benefits your organization and your 403(b) plan participants because:
- contributions can remain in the 403(b) annuities or custodial accounts,
- participants’ 403(b) annuities and custodial accounts retain their tax favored status, and
- your organization avoids penalties.
Make a VCP submission
- file under the VCP, using Appendix C part 1 Model Compliance Statement, Schedule 6 and Form 8950, Application for Voluntary Correction Program (VCP), and Form 8951, Compliance Fee for Application for Voluntary Correction Program (VCP)
- pay a compliance fee to the IRS based upon the number of employees eligible to participate in the plan
- mail completed documents and any other required documents to:
First class mail:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
Express mail or private delivery service:
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011