Linda Segal Blinn
An employer with a 403(b) plan must have a written plan that identifies the plan’s investment arrangements in order to satisfy the IRS regulatory requirements. But what happens if the terms of the 403(b) plan document conflict with the provisions of an investment arrangement identified in the 403(b) plan?
Volume Submitter and Prototype Plans
IRS criteria for receiving an opinion letter on volume submitter or prototype 403(b) plan document include ensuring that potential conflicts between the plan document and the investment arrangements are resolved in favor of the plan document. Section 8.05 of IRS Revenue Procedure (Rev. Proc.) 2013-22 requires that pre-approved plan documents state that “in the event of any conflict between the terms of the pre-approved plan and the terms of investment arrangements under the plan (or of any other documents incorporated by reference into the plan), the terms of the pre-approved plan shall govern.” If the terms of the investment arrangement provide that the investment arrangement’s rules shall govern in the event of such a conflict, then the employer “may not rely on an opinion or advisory letter issued with respect to a Section 403(b) pre-approved plan …”
Many pre-approved 403(b) plan documents satisfied this potential conflict by incorporating sample language set forth in #15 of the 403(b) Plan Listing of Required Modifications (LRMs). LRM #15 defines “Investment Arrangement,” addressing potential conflicts between the plan document and investment arrangements by stating: “The terms governing each Investment Arrangement under the Plan, excluding those terms that are inconsistent with the Plan or section 403(b) of the Internal Revenue Code, are hereby incorporated by reference in the Plan.”
Individually Designed Plans
While LRM #15 settles matters for adopters of pre-approved 403(b) prototype and volume submitter plans, an employer with an individually designed 403(b) plan needs to understand whether the same standard identified in LRM #15 would apply to individually designed 403(b) plans. In an appendix to the “Employee Plans: Analysis and Recommendations Regarding 403(b) Plans” (part of the 2015 Report of Recommendations of the IRS Advisory Committee on Tax Exempt and Government Entities (ACT)), the Employee Plans Subcommittee noted that a considerable segment of 403(b) plan sponsors may decide to continue maintaining an individually designed plan. In response to the survey question asking why an employer might not adopt an IRS pre-approved 403(b) plan, 403(b) plan sponsor and vendor survey respondents cited the complexity of the current plan document, collective bargaining issues, no rationale for restating to a pre-approved plan document, and less value placed on having a favorable IRS opinion letter associated with the 403(b) plan document.
The IRS indicated in Rev. Proc. 2013-22 that it lacks the resources to establish a determination letter program for individually designed Section 403(b) plans in the foreseeable future. However, the IRS 403(b) Examination Guidelines leave no room for doubt regarding the IRS’ requirement that investment arrangements do not conflict with the plan document, regardless of whether the plan document is pre-approved or individually designed:
“[t]he annuity contract must comply with the terms of the written plan, if subject to the written plan requirement.” (See I.R.M. Section 18.104.22.168.1(4)). IRS auditors of 403(b) plans (regardless of whether those documents are individually designed or pre-approved) are instructed to “[v]erify that the annuity contracts and custodial accounts meet the language requirements and do not contradict the plan. If any conflicts exist, the plan will govern.” (See I.R.M. Section 22.214.171.124.7(6))
The 403(b) LRMs can be found at http://www.irs.gov/pub/irs-tege/403b_lrm0313.pdf
, the IRS 403(b) Examination Guidelines at https://www.irs.gov/irm/part4/irm_04-072-013
, and the ACT Report dated June 17, 2015 at https://www.irs.gov/pub/irs-prior/p4344--2015.pdf
Linda Segal Blinn, J.D.*, is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this capacity, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.
This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.
* Linda is not a practicing attorney for Voya Financial.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.