Section 403(b) of the Internal Revenue Code and the associated regulations establish the rules for retirement plans that are sponsored by certain tax-exempt entities, public schools, and churches. Under regulations issued in 2009, the IRS required these plans to be administered under a written plan document. However, unlike other types of retirement plans such as 401(k) and other 401(a) qualified plans, the IRS did not provide a way for the sponsors of 403(b) plan documents to request a determination letter to obtain IRS approval for those documents. In 2013, the IRS announced a program under which they would approve “volume submitter” documents, standard documents that are to be used by many plans with limited customization. However, there was no program for the approval of an individually designed 403(b) plan.
The IRS has now issued Revenue Procedure 2022-40, allowing the sponsor of an individually designed 403(b) plan to submit a request for a determination letter. Under this program, for the first time, an individually designed 403(b) plan will be able to rely on the IRS’ approval that the form of the document meets all IRS requirements. The Revenue Procedure generally follows the rules that apply to determination letter requests filed by sponsors of qualified plans. Plan sponsors will be able to request a determination letter for an initial plan determination when terminating a plan, or under other circumstances that the IRS announces. The definition of an initial plan determination generally means the first time a plan has requested a determination letter. Since individual 403(b) plans have not had the opportunity in the past to apply for a letter, most 403(b) plans should be eligible to apply under this program.
The revenue procedure sets out a schedule for when an individually designed 403(b) plan sponsor can submit a request for a determination letter, presumably to spread out the work for the IRS. Plan sponsors whose EIN ends in 1, 2, or 3 can submit an application beginning on June 1, 2023; if the plan sponsor’s EIN ends in 4,5,6, or 7, on June 1, 2024; if the plan sponsor’s EIN ends in 8,9 or 0, on June 1, 2025. In addition, beginning on or after June 1, 2023, a Plan Sponsor may submit a 403(b) individually designed plan for a determination upon plan termination, without regard to this schedule that applies to an initial plan determination.
Over the last few years, many 403(b) plans have been restated on 403(b) volume submitter documents and have moved away from individually designed plans. There are some significant advantages to using a volume submitter document, including the obligation of the volume submitter issuer to keep the plan up to date. But there are also good reasons why a plan sponsor might want to maintain an individually designed plan. For example, some more complex plan designs, such as older plans that have been through a series of mergers, don’t lend themselves well to the more limited template of a volume submitter. For sponsors that are maintaining such plans, the new determination letter procedure may be extremely useful.