Historically, an important element of compliance for tax-qualified plans under Code Section 401(a) or 403(a) was the submission of a request for a favorable determination letter on the form of the plan document. Indeed, requesting a favorable plan determination was such a standard action that the failure to make such a submission in a timely manner was regarded by some as a breach of fiduciary duty. Effective January 1, 2017, Revenue Procedure 2016-37, in an action that was controversial at the time, provided that a sponsor of a qualified individually designed plan is permitted to submit an application for a favorable determination letter only for initial plan qualification, for qualification upon plan termination, and in certain other circumstances as set forth in published IRA guidance. For the 2023 year, the only additional special circumstance in which a favorable determination letter can be requested is for merged plans.
Even though the ability of a plan sponsor of a tax-qualified plan to apply for a favorable determination letter has been limited since 2017, sponsors of tax-qualified plans were in a better position than the sponsors of individually designed 403(b) plans, for whom there was no procedure for requesting a favorable IRS determination letter on the form of an individually designed plan document. The IRS had provided a remedial amendment period (which ended June 30, 2020) for Section 403(b) plans to correct form defects, but the sponsor of an individually designed Section 403(b) plan could not obtain confirmation from the IRS by way of a favorable determination letter, that the language of its 403(b) plan satisfied the requirements of Code Section 403(b) and the regulations thereunder.
In Revenue Procedure 2022-40, IRS announced that beginning June 1, 2023, determination letters for Section 403(b) plans generally may be submitted for an initial determination letter, for a determination upon plan termination, and in certain other circumstances specified in guidance published by IRS. It does not appear that the additional merged plan circumstance available to tax-qualified plans would be applicable to a Section 403(b) plan in 2023.
To avoid having all eligible 403(b) plans filing on June 1, 2023, the IRS has established a staggered system based on the last digit of the employer’s tax identification number. If the last digit of the EIN is 1, 2 or 3, the initial submission date is June 1, 2023; if the last digit is 4, 5, 6 or 7, the initial submission date is June 1, 2024; and if the last digit is 8, 9 or 0, the initial submission date is June 1, 2025. The determination letter will only address issues under the Internal Revenue Code, and not Title I of ERISA, including whether the 403(b) plan is subject to Title I of ERISA. Additionally, a determination letter will not consider issues related to whether the plan meets any requirements that apply due to a plan’s coverage of multiple employers that are not part of a controlled group under Code Section 414(b) or (c) or an affiliated service group under Code Section 414(m), or treated as a single entity under Code Section 414(o).
With two very limited exceptions – a TEFRA church defined benefit plan and a plan grandfathered under Rev. Rul. 82-102 with respect to deferrals made to a credit union – the new program will be available to all individually designed 403(b) plans. However, if there were any form defects in an individually designed 403(b) plan, a favorable determination letter will only be available for the plan if: (i) the error first occurred after June 30, 2020, and (ii) it is corrected by the last day of the second calendar year following the year in which the form defect first occurred. If those two conditions cannot be satisfied, then the plan sponsor will need to seek reinstatement of the plan’s favorable tax status under the IRS’ Employee Plans Compliance Resolution System.
As a procedural matter, a notice to interested parties must be provided to all interested parties before a determination letter application is filed. However, since Code Section 7476, the section dealing with notice to interested parties, does not apply to Section 403(b) plans, the requirement of notice to interested parties for determination letter requests for individually designed 403(b) plans will in the future be set forth in the annual revenue procedure that IRS issues at the beginning of each year. Additionally, Code Section 6110, relating to the public inspection of written determinations, applies to determination letters for individually designed 403(b) plans, but the public inspection requirements for applications filed with IRS do not apply to Section 403(b) submissions.
If you have any questions about your 403(b) plan and whether it is in legal compliance, our experts would be happy to speak with you.