In an article originally published by National Benefit Services and edited by Jerry Kalish on The Retirement Plan Blog, the issue of errors in 403(b) plans was discussed. In particular, a parallel was drawn between 403(b) plans and 401(k) plans. At issue ultimately is a matter of Plan Sponsor prudence in governance matters.
Ultimately, Kalish comes to the conclusion that human nature, rather than regulation is the root cause for most errors. Although updated back in 2009 by the Internal revenue service, Kalish points out that 403(b) plans are still not in compliance with rule changes. This ultimately comes down to how “prudent” the plan sponsor is. And considering the rash of lawsuits against plans and plan sponsors and their advisors, the issue of prudence is a very familiar topic of the litigation.
IRS Changes as of January 1, 2009:
- Requirement for a plan document – A plan document is a type of prospectus or a roadmap for the plan. It lays out specific rules for strategies and processes that the plan administrators will follow in managing the plan. This document is required to be signed by the plan sponsor.
- Non-discrimination rules – like 401(k)plans, 403(b) plans must be “universally available” to all eligible employees. This followed similar regulations for 401(k) rules to prevent sponsors from offering superior plans to management and key employees.
- Contribution limits – Plan sponsors are responsible for the compliance of 403(b) contributions with the Internal Revenue Code including the correction of excess amount contributed.
- Timing of Contributions. Plan sponsors must deposit contributions to plan providers within a “reasonable period” of time.
- Transfers to Other 403(b) Contracts. New rules affect participants’ moving their assets to other 403(b) annuities or 403(b) custodial accounts.
- Plan Termination. The new rules permit 403(b) plan sponsors to terminate their plan and distribute the assets under specified conditions.
Kalish points out that as the regulation of 403(b) have become similar to 401(k)’s, so do the mistakes made by plan sponsors. Below is a list of common mistakes cited in the blog post:
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The employer wasn’t eligible in the first place to sponsor a 403(b) plan.
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A written plan documents intended to satisfy the new rules was not adopted by December 31, 2009.
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The terms of the 403(b) written plan document weren’t followed.
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All eligible employees weren’t given the opportunity to make a salary deferral.
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The 403(b) plan didn’t limit the total employer and employee contributions to not exceed IRS limits.
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The catch-up provisions were not administered properly.
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Loan amounts were not limited, and repayment provisions were not enforced.
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There wasn’t documentation that hardship distributions met the IRS requirements.
That being said, Kalish goes on to offer suggestions on how to correct these common mistakes and avoid the consequences of disqualification through the IRS Employee Plans Compliance Resolution System (“EPCRS”). There are three ways to correct mistakes under EPCRS:
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Self-Correction Program (SCP)permits a plan sponsor to correct certain plan mistakes without contacting the IRS or paying any fee.
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Voluntary Correction Program (VCP)permits a plan sponsor to, any time before audit, pay a fee and receive IRS approval for correction of plan failures.
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Audit Closing Agreement Program (Audit CAP)permits a plan sponsor to pay a sanction and correct a plan failure while the plan is under audit.
As with 401(k) plans it is better to correct mistakes voluntarily. The point of fiduciary responsibility is to hold those who govern and influence a plan accountable. That’s why “prudence” is generally a word most associated with regulation…and litigation. Being excessively prudent about plan compliance is a virtue.
