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EPCRS Now Covers Common 403(b) Compliance Issues

Recent updates to the IRS’s Employee Plans Compliance Resolution System (“EPCRS”), as announced in
Revenue Procedure 2013-12, will allow tax-exempt organizations and public schools that sponsor Section 403(b) retirement plans to correct additional compliance problems under those plans. Although EPCRS also applies to Section 401(a) and other employer retirement plans (and we have summarized the key changes applicable to 401(a) plans in a separate article), the primary purpose of these updates was to establish procedures for correcting plan document and operational failures under Section 403(b) plans. The updates are generally effective for corrections or submissions made on or after April 1, 2013, although they may also be applied immediately.

Overview of EPCRS

While revising the process for obtaining IRS approval of certain compliance problems (including plan document failures and “significant” operational failures), Rev. Proc. 2013-12 retains much of the existing structure of EPCRS. Thus, EPCRS will continue to consist of the following three components: the Self-Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“Audit CAP”). Following these updates, these components will apply to 403(b) plans in much the same way they apply to 401(a) plans.

Effect of Final Section 403(b) Regulations

The previous version of EPCRS (as set forth in Revenue Procedure 2008-50) was issued before the effective date of the final Section 403(b) regulations. Those regulations were published in 2007, but generally effective as of January 1, 2009.  Prior to the final regulations, non-ERISA 403(b) arrangements were not even required to be in writing.  However, the regulations required that all 403(b) arrangements be maintained pursuant to a “written plan,” and that they then be operated in accordance with the terms of that plan. Under transition relief granted in Notice 2009-3, sponsors of 403(b) plans had until the last day of the 2009 plan year to adopt a written plan document (if certain requirements were met during the 2009 plan year).

Although many tax-exempt employers were already required (under ERISA) to have a written 403(b) plan, certain salary-deferral-only plans, as well as plans maintained by churches and public schools, are exempt from ERISA – and therefore exempt from its requirement to have a written plan. Because the final IRS regulations imposed significant new requirements on these non-ERISA 403(b) plans, many of their sponsors were unable to comply by the applicable 2009 deadline.

EPCRS Changes Unique to 403(b) Plans

The updated version of EPCRS includes the following provisions that apply specifically to 403(b) plans: 

  1. Failure to Adopt a Timely Written Plan.  403(b) plan sponsors that failed to adopt a “written plan” by December 31, 2009 (or by January 1, 2009, if they did not qualify for the transition relief under Notice 2009-3), may now correct that failure by making a submission under VCP and paying the applicable compliance fee.  If the failure to timely adopt a written plan was the only failure – and if the submission is made by December 31, 2013 – the sponsor will be eligible for a 50% reduction in the compliance fee.  (The “regular” VCP compliance fee ranges from $750 for plans with 20 or fewer participants to as much as $25,000 for plans with over 10,000 participants.)  The IRS has also posted on its website a VCP Submission Kit specifically intended for 403(b) plan sponsors that missed the 2009 deadline for adopting a written plan.

  2. Failure to Comply with Written Plan.  403(b) sponsors that adopted a written plan by the applicable 2009 deadline, but then failed (at any time after that date) to operate the plan in accordance with the terms of that document, may generally correct such an “operational failure” under EPCRS in the same manner as if the failure had occurred under a Section 401(a) qualified plan.  “Insignificant” failures, and certain significant failures that are corrected within two plan years after they occur, are eligible for self-correction under SCP, but other failures must be submitted to the IRS under VCP (and the sponsor must pay the required compliance fee).  Note that EPCRS cannot be used to correct a failure to follow the terms of a 403(b) plan document that occurred before January 1, 2009.  This is because 403(b) plans were not required to have a “written plan” before that date.

  3. Failure to Comply with Section 403(b).  403(b) sponsors that have failed to operate their plans in accordance with the requirements of Code Section 403(b) (e.g., by making contributions in excess of an applicable contribution limit, or by making distributions in violation of the statutory distribution restrictions) may also correct those errors under EPCRS. In fact, EPCRS includes special rules for statutory requirements that are unique to 403(b) plans.  If such failures occurred prior to 2009, however, they should generally be corrected under the terms of the prior version of EPCRS (as set forth in Rev. Proc. 2008-50).

  4. Extended 403(b) “Remedial Amendment Period.”  403(b) plan sponsors that are eligible for the extended “remedial amendment period” described in IRS Announcement 2009-89 (i.e., employers that adopted a “written plan” by the applicable 2009 deadline and then eventually adopt a “prototype” 403(b) plan that has been pre-approved by the IRS) will not experience a “plan document failure” – provided they adopt the prototype before the last day of the remedial amendment period.  This remedial amendment period will not end until the IRS (i) opens its “403(b) prototype” program, (ii) reviews and approves the proposed documents submitted by prototype plan sponsors, and (iii) provides a window of time for plan sponsors to adopt such a “pre-approved” plan.  403(b) plan sponsors that qualify for this remedial amendment period will therefore have several more years before they must amend their plans to reflect the statutory or regulatory changes occurring subsequent to the 2007 regulations.

  5. Requirement to Have a “Favorable Letter.”  Certain correction options under EPCRS are limited to plans that have a favorable IRS determination (or opinion) letter.  The new version of EPCRS provides that a 403(b) plan will be treated as having such a “Favorable Letter” if either (i) the employer timely adopted a written plan that was intended to satisfy Section 403(b) (including the 2007 final regulations) by the applicable 2009 deadline, or (ii) the employer failed to timely adopt a written plan but corrected that failure through a VCP submission (as described in item 1, above).

Conclusion and Recommendation

These EPCRS updates should be welcome news to sponsors of 403(b) plans, particularly those that either failed to adopt a written plan document before the applicable 2009 deadline or failed (after that deadline) to operate their plan in accordance with the terms of that document.  Because certain compliance failures may be self-corrected, while others may be corrected (with the IRS’s written blessing) in return for a relatively modest compliance fee, it is generally less expensive to identify and correct 403(b) compliance issues voluntarily (through EPCRS) than it is to pay a negotiated sanction upon audit.

If you are aware of any compliance issue with your 403(b) program, please contact any member of Spencer Fane’s Employee Benefits Group and we will help you determine whether (and how) that failure can be corrected under EPCRS.