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Maintaining Eligibility to Sponsor a 403(b) Plan

Did you know only certain tax-exempt employers are eligible to sponsor an Internal Revenue Code Section 403(b) plan?

Tax-exempt employers that may sponsor a 403(b) plan are:

  • Tax-exempt organizations established under IRC Section 501(c)(3)
  • Public school systems
  • Cooperative hospital service organizations
  • Uniformed Services University of the Health Sciences Civilian faculty and staff
  • Public school systems organized by Indian tribal governments
  • Certain ministers:
    • Employed by a 501(c)(3) organization
    • Self-employed
    • Ministers not employed by a 501(c)(3) organization, but functioning as a minister in their daily responsibilities with their employer, such as a hospital chaplain

An organization may meet more than one of the above criteria, so even if it loses its 501(c)(3) status, it may still be eligible to sponsor its 403(b) plan under another category.

The Employee Plans Compliance Unit conducted a project related to 403(b) plan sponsorship eligibility for organizations that lost their 501(c)(3) exempt status due to the automatic revocation for not filing a required return for three consecutive years. Some entities were unaware that their 501(c) status affected their eligibility to sponsor a 403(b) plan.

Reporting requirements for 501(c)(3) organizations

Generally, all entities exempt from federal income tax under Internal Revenue Code Section 501(a) are required to file an annual return reporting their operations and activities (IRC Section 6033). Exempt entities must file an annual notice with the IRS using a Form 990 series return (IRC Section 6033(j) as added by the Pension Protection Act of 2006). The exempt status of entities that don’t file a required return or notice for three consecutive years is automatically revoked.

501(c)(3) reinstatement

If you received a CP120A Notice, your organization’s tax-exempt status has been revoked for failure to file a Form 990 series return for three consecutive years. You may be able to apply to have your exemption reinstated by completing Form 1023 or Form 1023-EZ. You must file an application for reinstatement even if you weren't originally required to complete one for tax-exempt status. To continue to maintain your 403(b) eligibility sponsorship, you should request a retroactive reinstatement.

Alternative ineligible employer correction

If you make errors in your 403(b) plan, you may be eligible to use the IRS Employee Plans Compliance Resolution System (EPCRS) to fix your mistakes and avoid the consequences of 403(b) annuity contracts or custodial accounts disqualification. You may be able to use the Voluntary Correction Program to maintain your plan’s qualified status.

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