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IRS Releases Model 403(b) Plan Document

As promised in the final Section 403(b) regulations, the Internal Revenue Service has now released a “model” 403(b) plan document suitable for adoption by any public school. This model language, along with guidance concerning the proper adoption procedures, is contained in Revenue Procedure 2007-71.

To comply with the final Section 403(b) regulations, each public school or Section 501(c)(3) organization that allows its employees to make 403(b) deferrals must adopt a written 403(b) plan document by January 1, 2009. Public schools may satisfy this requirement by adopting the IRS model – on essentially a word-for-word basis. Tax-exempt organizations may look to the model language for guidance, but they must modify the language to reflect any additional rules applicable to such employers, including those that might apply under ERISA.

Due to various provisions contained in the model plan document, a school may prefer to modify the language to better reflect its workforce or compensation strategy. For instance, the model document provides for only elective deferrals, with no matching or other employer contributions. Moreover, all deferrals would have to be made on a pre-tax basis; no after-tax (or “Roth”) contributions would be allowed. New employees would be automatically enrolled in the plan, and student teachers and employees who are normally scheduled to work fewer than 20 per week would be excluded entirely. Finally, any participant who defaults on a loan from the plan would be subject to a mandatory six-month suspension of further deferrals.

The final regulations do not mandate any of the provisions described in the preceding paragraph. However, any school that wishes to vary from the terms of the model document will want to do so only on the basis of competent legal advice. And, of course, all 403(b) plan sponsors will want to verify that the plan’s vendors can administer the terms of their plan. Thus, although the deadline for adopting a written plan is over a year away, it is not too soon to begin the process of drafting an appropriate document.