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Self-Correct Defective 403(b) Plan Provisions During the Remedial Amendment Period

403(b) plan sponsors may self-correct plan provisions that violate the Internal Revenue Code (IRC) Section 403(b) written plan rules by adopting plan amendments by March 31, 2020. This correction period is known as the “remedial amendment period” (RAP) (Rev. Proc. 2017-18). During the RAP, sponsors of both 403(b) pre-approved plans and 403(b) individually designed plans are eligible to correct plan provisions that fail to meet IRC Section 403(b) requirements (including those under the 403(b) regulations and subsequent guidance) either by:

  • Adopting a 403(b) pre-approved plan by March 31, 2020, that has a 2017 opinion or advisory letter
  • Amending their individually designed plan by March 31, 2020

Correcting plan provisions may involve:

  • Adding required provisions, or
  • Correcting defective provisions

Generally, the correction must be retroactive to the later of January 1, 2010, or the plan’s effective date. In addition, if the plan was administered based on the defective provision, this also must be retroactively corrected.

To take advantage of the RAP, a sponsor must have adopted a written 403(b) plan by December 31, 2009 (or the effective date of the plan, if later). If you don’t meet this timing requirement, you must correct a plan’s violations under the IRS’s Voluntary Correction Program (VCP), which is a part of the Employee Plans Compliance Resolution System (EPCRS) described in Rev. Proc. 2016-51. By correcting through VCP, the sponsor would be treated as having adopted a written plan by the required deadline.

The following are examples of the types of plan provisions and plan operations that you can either self-correct during the RAP or apply to correct under VCP.

Relief available during the RAP

Example 1: non-compliance in form - absence of required provision

Plan A, adopted effective January 1, 2011, doesn’t contain language limiting participants’ annual additions (within the meaning of IRC Section 415(c)(2)) to the IRC Section 415(c) limit, as required by Treas. Regs. Section 1.403(b)-3(b)(3)(i). No participant in Plan A has exceeded the 415(c) limit since the start of Plan A’s RAP (January 1, 2011).

Conclusion: Because the terms of Plan A don’t include the 415(c) limits, Plan A doesn’t comply with the requirements of Treas. Regs. Section 1.403(b)-3(b)(3)(i). The plan sponsor must correct the plan’s form by adopting a corrective plan amendment by the end of Plan A’s RAP (March 31, 2020). The amendment must be effective retroactively to the start of the plan’s RAP on January 1, 2011.

Example 2: non-compliance in form and resulting operation - erroneous required provision

Plan B, adopted effective January 1, 2014, provides that participants may make elective deferrals of up to $18,000, an amount that exceeds the 2014 annual deferral limit of $17,500 of IRC Section
402(g) in violation of Treas. Regs. Section 1.403(b)-3(a)(4). In plan year 2014, two participants defer $18,000 as permitted under the Plan.

Conclusion: Plan B doesn’t comply with Treas. Regs. Section1.403(b)-3(b)(3)(i) both in form and operation. The plan sponsor must correct the form of Plan B by adopting a corrective plan amendment by the end of Plan B’s RAP (March 31, 2020) that is effective retroactive to the start of the plan’s RAP (January 1, 2014). The plan sponsor must also correct the associated excess deferrals that occurred in 2014 (during the plan’s RAP) based on EPCRS correction principles (Rev. Proc. 2016-51, Section 6).

Example 3: non-compliance in form - erroneous discretionary (optional) provision

Plan C, adopted effective in 2010, was amended effective January 1, 2014, to permit participants, age 50 and older to defer catch-up contributions up to $6,000. As drafted, Plan C violates IRC Section 414(v)(2) and Treas. Regs. Section 1.403(b)-4(c)(2), which limit catch-up contributions in 2014 to $5,500. In operation, no participant exceeded the statutory limit for any plan year.

Conclusion: Although a 403(b) plan isn’t required to provide catch-up contributions, if it does so, the terms of the plan must satisfy IRC Section 414(v)(2) to comply with the written plan requirements of the 403(b) regulations. Plan C’s sponsor must correct the form of the plan by adopting a corrective plan amendment by the end of the plan’s RAP (March 31, 2020) that is effective retroactive to the date the amendment allowing catch-up contributions was effective (January 1, 2014).

Relief not available during RAP

Example 4: compliance in form but not in operation

Plan D, adopted effective in 2012, provides that all employees may make elective deferrals. However, the plan sponsor operates the Plan in plan years 2012 - 2016 to exclude employees who work fewer than 20 hours per week (part-time employees) as otherwise permitted under Treas. Regs. Section 1.403(b)-5(b)(4)(ii)(E).

Conclusion: By excluding employees who work fewer than 20 hours per week during 2012 - 2016 without having a plan provision that permits that exclusion, the plan sponsor failed to operate the plan according to its terms. Therefore, Plan D doesn’t comply with Treas. Regs. Section 1.403(b)-3(b)(3)(i). The plan could have been drafted to exclude part-time employees, but wasn’t. Although Plan D, as drafted, complies with the 403(b) regulations in form, it wasn’t operated consistent with its terms and can’t be corrected by amendment during the plan’s RAP. Instead, the sponsor must correct this operational failure under EPCRS.

Example 5: compliance in form but not in operation

Plan E, effective in 2010, provides a 5% employer nonelective contribution. However, during plan years 2010 - 2015, the employer makes only a 4% nonelective contribution.

Conclusion: The plan sponsor failed to operate the plan according to its terms and it therefore doesn’t comply with Treas. Regs. Section 1.403(b)-3(b)(3)(i) (even though the Plan could’ve been drafted to provide a 4% employer nonelective contribution). Although Plan E complied with the section 403(b) regulations in form, it was not operated consistent with its terms. This operational failure can’t be corrected by amendment during the plan’s RAP. Instead, the sponsor must correct this failure under EPCRS.

Page Last Reviewed or Updated: 24-Feb-2017