403 (b) Plans Can Request Determination Letters In 2023

Soon, the IRS will allow 403(b) retirement plans to use the same approval process as other qualified plans. Depending on a plan sponsor’s employer identification number, this process can start as soon as June 1, 2023. Though there are some exceptions, most 403(b) plans will qualify in the new guidance outlined in Revenue Procedure 2022-40. A determination letter confirms a plan is operating by relevant rules and regulations.  This is welcome news for many Atlanta not-for-profit organizations which previously were not permitted to make a request. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

Changes to Initial Plan Determination for 403(b) Plans

In Rev. Proc. 2022-40, the IRS issued new guidance that sponsors of 403(b) plans can submit a determination letter regardless of how long the plan has existed. Any 403(b) or 401(a) plan can follow the new procedures if the plan has never previously submitted for IRS approval on Form 5300 and/or has never previously received an IRS determination letter. When a 403(b) plan submits a determination letter request, it must be restated unless the plan is terminated.

This guidance does not apply to pre-approved 403(b) plans; however, if a plan used preapproved language but substantially altered it to customize a new plan, it could still qualify for the new process.

The last time the IRS updated its guidance for determination letters was in 2016 when it eliminated the five-year cycle for submitting applications. At that time, many qualified plans could switch to standardized, prototyped, pre-approved plans where determination letters wouldn’t be required. 403(b) plans were still omitted from that change.

Timeline for New Determination Letter Process

403(b) plans will be allowed to submit determination letter applications based on the sponsor’s employer identification numbers (EINs).

The phased-in application start dates are listed below.

• For plan sponsor EIN ending in 1, 2, or 3: Beginning June 1, 2023
• For plan sponsor EIN ending in 4, 5, 6, or 7: Beginning June 1, 2024
• For plan sponsor EIN ending in 8, 9, or 10: Beginning June 1, 2025

After the applicable start date, determination letter requests must be submitted using Form 5300: Application for Determination for Employee Benefit Plan.

The new process for submitting a determination letter for merged plans only applies to 401(a) plans.

About IRS Determination Letters

It mentions individually designed plans, which are retirement plans drafted for only one employer’s use. Determination letters from the IRS issue an opinion on the plan’s qualified status.

Through determination letters generally aren’t required for plan sponsors, they can provide a certain level of assurance that the plan is qualified and retains its favorable tax treatment.

These letters are required when:

• There are substantial amendments to plan documents or the plan design
• Two or more plans merge to form one new plan
• A plan is terminated

Determination letters issued after January 4, 2016, do not have an expiration date; however, a favorable opinion cannot be relied upon for subsequent plan changes affected by a change in law, like the SECURE Act, for example.

When the IRS receives a determination letter request, it will review the plan within the scope of applicable annual required amendments and any law changes, like the CARES Act or SECURE Act.

The IRS maintains a list of required amendments by year. Generally, plan sponsors have two years to implement such amendments. The deadline for 2020 plan amendments is coming up on December 31, 2022. Not all required amendments will affect all plans.

In some cases, plans can retroactively amend provisions even if they miss the original due date. Plan sponsors can self-correct and often apply for the voluntary correction program, but only if the plan isn’t already subject to a determination letter review. Any errors must be corrected outside of that process. Thus, it’s important for plan sponsors to review plan documents thoroughly before requesting a determination letter.

Common Defects Found in Determination Letter Reviews

If a plan sponsor submits a determination letter request and the IRS finds defects in how the plan operates, sponsors must take remedial action. These are the most common defects in plan language that 403(b) plan sponsors should look for before submitting a determination letter application.

• A documented plan for locating missing participants and what to do if a participant is missing.
• Specific language addressing the plan’s compliance with the HEART Act, which addressed an employee’s eligibility for employment and benefits if they leave a civilian job for qualified military service.

There are other mistakes to watch out for, too.

• The plan didn’t adopt an approved written statement by December 31, 2009.
• The plan isn’t operating according to its written document(s).
• All eligible employees weren’t given the opportunity to make a salary deferral.
• There are errors with approved contributions and participant limits.
• Deferral errors for plans offering “15 years of service catch-up contributions.”
• Elective deferrals weren’t limited or operated properly
• Loan amounts weren’t limited or enforced
• Hardship distribution qualifications aren’t documented.

The IRS has resources to help identify and fix these errors before the IRS does.

What’s Next?

More changes are on the way for retirement plan submissions to the IRS. Guidance will be released soon that changes procedural requirements for plan submissions, like beginning to require electronic determination letter requests. Forms 5300 and 5310 would also be updated accordingly. Revenue Procedure 2023-4 will have more information once it’s released.

Contact Us

The recently announced change is welcome news for Atlanta tax-exempt organizations with a 403(b) or other eligible plan types. However, it is important to carefully review plan operations to ensure compliance before requesting a letter. If you have questions about the information outlined above or need assistance with a plan audit, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.