The 403(b) final regulations required a written program by January 1, 2009. Notice 2009-3 extended the deadline to December 31, 2009, if the plan sponsor: adopted a written plan intended to satisfy the requirements of IRC Section 403(b) (including the final regulations) effective as of January 1, 2009, operated the plan in accordance with a reasonable interpretation of IRC Section 403(b), considering the final regulations during 2009, and corrected the plan operation to match the written program before the end of 2009, placing the participants in the same position they would have been in if the program had been adopted on January 1. The correction should be based on the general principles in Section 6 of Revenue Procedure 2021-30 PDF. See Correcting Plan Errors. A 403(b) written program doesn’t need to be a single plan document, but may bundle several documents that may include mandatory and optional provisions. The employer is responsible for ensuring it operates the plan according to the written program. The employer should establish information sharing procedures with all plan vendors so the plan meets all legal requirements. Mandatory provisions A 403(b) plan’s written program must contain all the following material terms and conditions: Eligibility – The plan must explain who can participate. If a plan, other than a church plan, allows elective deferrals (salary deferrals), it must satisfy universal availability, which means that if the plan permits one employee to defer salary, it must extend this offer to all employees with limited exceptions. Benefits – Generally, the Code requires employer contributions (other than in a governmental plan, a church plan or a 403(b) safe-harbor plan) to meet certain nondiscrimination requirements. The requirements are as follow: the percentage of highly compensated employees benefiting under the plan compared to non-highly compensated employees benefiting under the plan isn’t too high according to the minimum coverage tests, the plan doesn’t favor HCEs in terms of contributions, benefits, rights, features, plan amendments or plan terminations, and the plan meets the actual contribution percentage rules for matching and after-tax employee contributions. Limitations – Contributions and benefits under a 403(b) plan, including all aggregated plans, contracts or arrangements of the employer, must comply with the following limits: Amount of compensation that can be considered, Total annual additions, and Amount of elective deferrals, if the plan allows elective deferrals. Contracts (investments) under the plan – Individual accounts in a 403(b) plan can be any of the following types: An annuity contract, which is a contract provided through an insurance company, A custodial account, which is an account invested in mutual funds, or A retirement income account set up for church employees. 403(b) plans can’t be funded with life insurance (issued after September 24, 2007), endowment, health, accident or other types of insurance contracts. Timing and form of plan benefit distributions – The plan can’t distribute any amounts unless a participant: severs employment, has a hardship, becomes disabled (within the meaning of IRC Section 72(m)(7)), or reaches the age of 59 ½. The written program must state any form in which the plan may pay benefits, such as a lump sum distribution or annuity. Return to top Optional provisions A written 403(b) program may contain optional provisions and all material terms and conditions related to these provisions. The following are examples of optional provisions: Automatic contribution arrangements (automatic enrollment) – Allows an employer to automatically enroll eligible employees in its plan unless an employee elects otherwise. Designated Roth accounts – Allows employees to designate elective deferrals as designated Roth contributions (which are included in gross income), rather than traditional, pre-tax elective contributions. In-service contract exchanges – The plan may limit contract exchanges to vendors approved under the plan. The plan can only permit contract exchanges from a plan vendor to non-plan vendor if the non-plan vendor enters into an information sharing agreement. Plan-to-plan transfers – Allows current and former employees to make plan-to-plan transfers only under the following conditions: the receiving plan permits transfers, the participant’s benefit after the transfer is at least equal to the prior benefit, and the receiving plan’s distribution restrictions are at least as strict as those of the transferor plan. Elective deferral catch-up contributions: 15+ years of service; or age 50 or older Five-year employer contribution provision for retired/terminated employees – Nonelective employer contributions may be made for up to 5 years following an employee’s severance of employment, but these contributions are subject to nondiscrimination testing (except for governmental plans) and annual contribution limits. Loans – Must limit the maximum amount that can be borrowed to the lesser of: 50% of vested account balance or $10,000 (whichever is greater); or $50,000. If the plan allows loans, employers must provide plan vendors with adequate information to administer the loans properly. Hardship distributions – Allows distribution of elective deferrals if stated criteria are met. Employers must provide plan vendors with adequate information to administer the distributions properly, including the criteria for making the hardship distributions. Employer’s right to terminate the plan – Must include provisions allowing the employer to eliminate future contributions for existing participants and allow a distribution of accumulated benefits with a right to roll over eligible rollover distributions to an eligible retirement plan or an IRA. Correcting a failure to adopt a written 403(b) plan 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. 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, and Pay a user fee based on the amount of assets associated with the plan. Make your VCP submission electronically using via the www.Pay.gov website by completing their version of Form 8950, Application for Voluntary Correction Program (VCP) instructions PDF. Be sure to include: Form 14568, Model VCP Submission Compliance Statement PDF Form 14568-B, Model VCP Compliance Statement - Schedule 2: Other Nonamender Failures and Failure to Adopt a 403(b) Plan Timely PDF 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 2021-30 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. Return to top Related Sample Plan Provisions PDF – To assist in drafting 403(b) prototype plans Model Plan Language for Public Schools – Provisions that public schools may use to draft a written program that reflects the final 403(b) regulation’s requirements. Other types of eligible employers may also tailor the model language to use for their 403(b) plans. Recent Guidance Affecting 403(b) Plans Department of Labor’s Reporting and Coverage for 403(b) Plans – Includes FAB 2010-01, which discusses Annual Reporting (Form 5500) and ERISA coverage for 403(b) Plans 403(b) Plan and Related Publications Frequently Asked Questions – 403(b) Tax-Sheltered Annuity Plans