In the February edition of Benefits News, we reported on the IRS’ announcement of a remedial amendment period (“RAP”) for 403(b) plans. Under the RAP, the IRS will allow 403(b) plans to retroactively self-correct any defects in the form of the plan. Plans can be corrected for the period that starts on January 1, 2010 (or, if later, the effective date of the plan), and ends on March 31, 2020. In order to take advantage of the retroactive correction period, a plan sponsor must either adopt a 403(b) pre-approved plan or amend its current plan to comply with all the requirements under 403(b), by March 31, 2020. (For more information, see, “IRS Announces Long Awaited 403(b) Plan Rule”, Benefits News, February 2017).
At the end of February, the IRS provided some helpful guidance explaining what may or may not be corrected during the RAP. The governing principle is that a plan sponsor can correct errors in the form of the document but not errors in the operation of the plan. Here are some specific examples of how this rule is to be applied.
Relief that is Available During the RAP
Absence of a required provision: 403(b) plans are required to contain language that set out the limits that apply to the maximum annual contributions that can be made to a participant’s account each year ($54,000 in 2017). If a plan does not contain the required language, the plan sponsor can correct the error by amending the plan to include the missing provision or by adopting a 403(b) pre-approved plan, by March 31, 2020.
Plan contains an erroneous provision: 403(b) plans are required to have language that restricts the elective deferrals that can be contributed to the plan each year to the statutory limit ($18,000 in 2017). If a plan contains a provision that incorrectly states that the elective deferral limit in 2017 is $20,000, the plan sponsor can correct the error by amending the plan to correct the provision or by adopting a 403(b) pre-approved plan, by March 31, 2020. Note that if a participant contributed more than the elective deferral limit under the erroneous provision, the excess deferral must be corrected as well under the IRS’ correction program (EPCRS”).
Erroneous optional provision: If a 403(b) plan includes an optional provision, it must be in compliance with the applicable statute or regulations. For example, a plan that allows participants who have attained age 50 to contribute additional elective deferrals must have language that restricts those additional contributions to the statutory limit ($6000 in 2017). If a plan has a provision that incorrectly states the limit, the plan sponsor can correct the error by amending the plan to correct the provision or by adopting a 403(b) pre-approved plan, by March 31, 2020.
Relief that is Not Available Under the RAP
Absence of a provision from the plan: A 403(b) plan may optionally be designed to exclude certain part-time employees from the opportunity to contribute elective deferrals. If a plan does not contain a provision that provides for that optional exclusion but excludes the part-time employees anyway, the plan has not been operated in accordance with its terms. This is an operational failure, not an error in the form of the document, and cannot be corrected by amendment or the adoption of a pre-approved plan during the RAP. The error must be corrected through EPCRS.
Failing to follow a provision of the plan: A 403(b) plan may establish any schedule for employee contributions that otherwise complies with the applicable contribution rules. If a 403(b) plan provides for an employer non-elective contribution of 5% per year, but the employer only makes a contribution of 4% in a year, the plan has not been operated in accordance with its terms. This is an operational failure, not an error in the form of the document, and cannot be corrected by amendment or the adoption of a pre-approved plan during the RAP. The error must be corrected through EPCRS.
In order to obtain relief under the RAP going back to January 1, 2010 (or, if later, the effective date of the plan) the amendment correcting the document failures or the pre-approved plan must be effective retroactively to the first day of the RAP. In a future edition of Benefits News, we will discuss some of the drafting challenges associated with this retroactive effective date, as well as the potential advantages and disadvantages of adopting a pre-approved plan.
Please feel free to contact us if you need advice regarding 403(b) plans or retroactive corrections to them.
© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of March 31, 2017.