The following Q&As came from a discussion between the IRS and providers of 403(b) pre-approved plan documents about the current Cycle 2 403(b) program. Q1: What happens to new employers who want changes after the two-year window is up now that we have eliminated the substantially similar standard? A1: We’re no longer using the substantially similar concept available under the Cycle 1 403(b) volume submitter program. The substantially similar approach helped bridge the gap of not having a determination letter program available for Cycle 1. Now that we have added a determination letter program for Cycle 2, we’ll use the same approach we use for 401(a) pre-approved plans. For a new plan initiated after the two-year window has closed, any changes being considered need to be reviewed in conjunction with Revenue Procedure 2021-37. Section 9.03 indicates what type of amendments will not impact reliance on the opinion letter; for example, amendments to administrative provisions noted in section 9.03(7). You’ll need to determine if the deviations from the original pre-approved plan are permitted under section 9.03 of the revenue procedure. See section 9.05 for a description of situations where both the opinion letter may not be relied on, and it will cause a loss of eligibility for the cycle system. For example, incorporating a type of plan not permitted in the pre-approved program within 1 year of the initial adoption of the plan will cause the opinion letter to not be relied on and also a loss of eligibility for the cycle system. If the IRS determines under section 9.05(4) of the rev. proc. that the plan amendments are extensive and the plan is no longer substantially similar to the nonstandardized plan of the Provider, the adopting employer will lose reliance as of the effective date of the amendments. The plan will retain eligibility for the cycle system through the end of the cycle that includes the effective date of the amendments as long as any needed interim amendments are adopted timely. If you determine that the changes are outside the parameters of the re. proc., the plan may not fit under the pre-approved program and you should consider filing as an individually designed plan. Q2: What is meant by “non-extensive” changes? A2: Generally, a non-extensive change is something that could have been pre-approved during our normal process. Plans are typically drafted to cover a wide universe of potential adopting employers; however, you cannot anticipate every possible scenario that could fall under a pre-approved plan. An example of a non-extensive change is where the pre-approved document allows for employer non-elective contributions and has several vesting schedules approved in the nonstandardized plan but there is a need to add an additional schedule which meets IRC 411(a)(2). It’s possible that you could have several changes of this magnitude filed on a Form 5307. Keep in mind a Form 5307 is designed for a review that is generally less time intensive than a Form 5300. An example of an extensive change may be the addition of language covering a QACA feature. Q3: Does the IRS plan to update Form 5307 and its instructions? The current version still refers to the requirements for submitting Volume Submitters/Prototypes. A3: Yes, an updated version for 401(a) plans is expected to be released in mid-2023. Q4: Is participation by QCCOs or Non-QCCO before July 1, 2020 disqualifying, or is it that you don’t want to disturb the Cycle 1 opinion letters by having an amendment effective in Cycle 1? A4: The SECURE Act made changes to 403(b)(9) Retirement Income Account Plans which will now accommodate participation by QCCO’s and Non QCCO’s. Participation by QCCO’s and Non-QCCO’s before July 1, 2020, is not disqualifying. Rev. Proc. 2021-37, section 25.03, indicates that an adopting employer may not rely on the Cycle 1 opinion letter with respect to the amendment permitting participation of those employees; however, reliance is retained for all other purposes. Q5: Is there an anticipated end to the 2-year restatement period? A5: Yes, at this point we expect to issue opinion letters on November 30, 2024. The restatement window would open January 1, 2025, and run through December 31, 2026. Q6: Even though the CARES Act provisions are in the recently issued LRM, do the CARES Act provisions really need to be included in the new 403(b) submission since these provisions are only relevant to 2020 (over 2 years prior to the submission)? A6: The CARES Act relief provisions for coronavirus-related distributions and loans were reflected on the 2022 Cumulative List. See Notice 2022-8, Part IV, item 9. Therefore, the LRM reflects that. However, they are technically optional provisions - plans do not have to adopt them. Since it’s likely that some of your clients did utilize these provisions, they should be addressed in the plan document submitted for approval. See coronavirus relief FAQ 9. Q7: Do you prefer having a document with track changes (red line version) from the previous pre-approved 403(b) plan? A7: Yes, we prefer a complete red line version which takes the pre-approved plan from Cycle 1 and indicates where all the changes have been made. Q8: Any update on the possible opening of an individually designed 403(b) plan determination letter process? What are the prospects we will know about that before May 1, 2023? Some 403(b)(9) plans may want to choose between pre-approved or individually designed. A8: Resources have been devoted to the planning and developing of a program. As of now, no other information is available. Q9: Some 403(b)(9) plans will not have underlying provider “investment arrangements” as is the case with 403(b)(1) or 403(b)(7) plans. They will have their own proprietary, non-registered investment funds. 403(b)(9) plan documents will have to do more than simply cross-reference the 401(a)(9) rules since the underlying “investment arrangements” do not have their own separate annuity contracts or custodial accounts documents. A9: It appears these particular 403(b)(9) plans represent a unique situation where the use of the provisions contained in LRM 43 will not suffice. Our current position on this issue for a Cycle 2 pre-approved 403(b) plan may need to be re-evaluated for those 403(b)(9) plans which fall into this category. We ask that you highlight this issue in your cover letter to each pre-approved 403(b)(9) plan you submit to us for a Cycle 2 opinion letter where this fact pattern exists for an employer who will be adopting the pre-approved plan. In the meantime, we elevated this issue for further consideration. Q10: Regarding the use of “reserved” sections, I would think that allowing this would be helpful for the IRS. The RIA must be a separate plan but most of the provisions are the same as a custodial/annuity plan. For those sections that differ, using “reserved” enables the section references to remain the same. For example, the term RIA may be in the definition section. If it’s deleted in the custodial /annuity plan, then the numbering all subsequent definitions change. The drafter – and the IRS – then need to check all references in the plan to those sections. Reserved isn’t used for employers nor for modifications of the plan after approval. It’s just a more efficient manner of drafting different BPDs. A10: The situation described make sense for the use of “reserved” sections. However, in our experience, this has not always been the case for their existence in a pre-approved plan. While we would prefer no “reserved” sections exist in a pre-approved plan, we’ll permit an exception to this policy for this specific reason only. For the exception to be made, you must explain in the cover letter to the submission why you included “reserved” sections in your plans. Clearly notate the reason as a note underneath at least the first appearance of a “reserved” section in each plan. Q11: Are you taking the same positions relating to discretionary matching contributions and definitely determinable benefits as you took with the Cycle 3 DC plans? A11: The basis for our position on discretionary matching contributions contained in a Cycle 3 Section 401(a) defined contribution plan can be found in Treasury Regulation 1.401-1(b)(1)(ii). This regulation states that a 401(a) profit-sharing plan must provide a definite predetermined formula for allocating contributions made to the plan. Our application of the written defined contribution plan requirement (Treas. Reg. 1.403(b)-3(b)(3)) to the 403(b) Pre-approved Plans Program for Cycle 2 expects any allocation formula for an employer matching contribution to satisfy the concept of a definite predetermined formula. We will not permit the plan language for a discretionary matching contribution formula which represented a compromise on this issue in June of 2020 between the IRS and the practitioner community for the Cycle 3 401(a) defined contribution plans program. We will no longer accept the following compromise language: If a discretionary Matching Contribution formula applies (i.e., a formula that provides an Employer with discretion regarding how to allocate a Matching Contribution to Participants) and the Employer makes a discretionary Matching Contribution to the Plan, the Employer must provide the Plan Administrator (or Trustee, if applicable), written instructions describing (1) how the discretionary Matching Contribution formula will be allocated to Participants (e.g., a uniform percentage of Elective Deferrals or a flat dollar amount), (2) the computation period(s) to which the discretionary Matching Contribution formula applies, and (3) if applicable, a description of each business location or business classification subject to separate discretionary Matching Contribution allocation formulas. Such instructions must be provided no later than the date on which the discretionary Matching Contribution is made to the Plan. A summary of these instructions must be communicated to Participants who receive discretionary Matching Contributions. The summary must be communicated to Participants no later than 60 days following the date on which the last discretionary Matching Contribution is made to the Plan. For a discretionary matching contribution formula to satisfy the definite predetermined requirement, the following aspects must be addressed in the plan document: The matching computation period, such as payroll period or plan year, must be identified; this will eliminate ambiguity over the need for a true-up. There must be a note regarding the possible need for a true-up at year end where the employer contributes more often than the computation period There must be a definite allocation formula for the discretionary match, such as “a discretionary match shall be allocated to each participant as a uniform rate, for example 100%, of deferrals up to a uniform deferral percentage The employer can have discretion over the matching contribution amount, the rate at which deferrals are matched, and any limit on the deferrals that are matched. The rate and limit are both factors in the determination of the amount of the contribution. The above sample discretionary matching contribution allocation formula retains this discretion but allows someone to know how it will be allocated. Q12: Can the Cycle 2 plan be drafted to allow an exclusion for union/collective bargaining employees from any safe harbor contributions – nonelective or match – even though they are eligible to defer under universal availability rules? A12: It appears this question is in relation to a 403(b) plan of an employer who must satisfy the nondiscrimination requirements of IRC Sections 401(a)(4) and 401(m) and is using one of the two safe harbor methods contained in Treas. Reg. 1.401(m)-3 to satisfy the nondiscrimination requirement with respect to matching contributions. Assuming this is the case, the answer to the question is no because each employee who is directly or indirectly eligible to make a cash or deferred election under the plan for the plan year or a portion of the plan year must receive the safe harbor employer non-elective contribution or the safe harbor matching contribution. Q13: 401(a)(38) lifetime portability – what is “no longer authorized to be held” – does that extend to a simple investment freeze of participation or new funds, or does it require an entire removal/liquidation of the fund? A13: Unfortunately, there has been no further guidance issued by the IRS on this change to the IRC by the SECURE Act to clarify the exact meaning of this phrase. Assuming an employer’s 403(b) plan is amended timely to include this change, a reasonable good faith interpretation is typically applied. Q14: Will all opinion letters (to all applicants) be issued on the same day, and if so, do we need to file our application by a given date (or just by the May 2023 deadline)? A14: Most of the opinion letters for a cycle are issued on the same day. This applies to any applicant who files within the announced one-year timely submission window for a cycle which for Cycle 2 of the 403(b) program is May 2, 2022, through May 1, 2023. If an applicant does not receive their opinion letter on this date, it’s either because there has been a delay in the processing of their timely filed application, or their application was filed after the one-year submission window. It’s possible for someone who was not a provider of a pre-approved 403(b) plan before the current cycle (i.e., new to the business) to file after the one-year timely submission window and receive their opinion letter on the date most letters are issued. This would only occur if the IRS can finish the processing of their application in time. Q15: Is there a quick way to identify what cycle a particular pre-approved document covers if you had either a plan document or adoption agreement, but did not have the opinion letter or any other identifying evidence? This question applies to all types of pre-approved plans – both 401(a) and 403(b). A15: Information identifying a particular cycle, such as “3rd cycle profit sharing/401k plan”, could be addressed in any of the following ways: As a page header or footer to each page As part of an introductory paragraph to the first page of a single document plan format or on the first page of both the basic plan document and the adoption agreement where the adoption agreement format is used On the signature page of the plan document or adoption agreement if applicable We encourage plan drafters to use one of these approaches to enable quick identification of the relative cycle for users.