If you failed to adopt a written plan reflecting a good faith attempt to comply with IRC Section 403(b) and the 403(b) final regulations by December 31, 2009, your 403(b) plan is no longer a qualified tax-deferred retirement plan as of January 1, 2009.
Voluntary Correction Program submission
You may correct this error under the IRS’s VCP if your organization or 403(b) plan is not under audit (Revenue Procedure 2013-12 Section 5.09). Your organization must:
- Adopt a written plan that complies with Treas.Reg. Section 1.403(b)-3(a)(3) (consult your organization’s benefits adviser if necessary),
- Make a VCP submission to the IRS (you may use the 403(b) VCP Submission Kit), and
- Pay a compliance fee based on the number of employees eligible to participate in the plan.
As part of your VCP submission, complete and mail:
- Form 8950, Application for Voluntary Correction Program (VCP) (instructions)
- Form 8951, Compliance Fee for Application for Voluntary Correction Program (VCP)
- Appendix C - Part 1 Model Compliance Statement
- Appendix C, Part II, Schedule 2, Nonamender Failures (other than those to which Schedule 1 applies)
- copy of signed and dated written 403(b) plan
- required 403(b) statements
- any other attachments
Benefits of correcting the failure
- All money that has been contributed to the 403(b) plan will remain tax-deferred.
- Plan participants’ annuity contracts and custodial accounts will retain their tax-favored status (Revenue Procedure 2013-12 Section 6.10).
Consequences of not correcting
Unless you correct this error under VCP:
- The organization has to withhold and pay payroll taxes from any plan contributions made after January 1, 2009, and
- Plan participants are liable for additional income tax because the funds in the 403(b) plan are generally not tax-deferred and don't receive favorable tax treatment under the Internal Revenue Code.