The Comparison of 457(b) Plans, 401(k) Plans, 403(b) Plans, and Deemed IRAs chart has now been updated to reflect recent developments, including:
- 2023 limits on contributions and benefits
- Changes in the Employee Plans Compliance Resolution System (EPCRS)
- Changes in the IRS determination letter program for 401(k) plans
- Addition of an IRS determination letter program for individually designed 403(b) plans
- The IRS opinion letter program for pre-approved 403(b) plans
With the IRS no longer issuing rulings or determination letters on individually designed qualified plans or § 403(b) plans under most circumstances, the importance of pre-approved plans (master, prototype, and volume submitter plans) has been vastly increased. Adoption of a pre-approved plan is now the sole method for an employer to have assurance that its plan meets IRS requirements. While § 403(b) plans cannot take the form of master plans, they can be structured as prototype or volume submitter plans.
Reflecting this, Revenue Procedure 2013-22 established a program for issuing opinion and advisory letters for § 403(b) pre-approved plans. Starting June 28, 2013, sponsors of plans intended to qualify as pre-approved § 403(b) plans were permitted to apply for such letters. The first letters have not been issued under that program yet, but the expectation is that they will be issued soon.
The IRS has now announced in Rev. Proc. 2017-18, 2017-5 I.R.B. 743, that the last day of the remedial amendment period for employers to adopt pre-approved § 403(b) plans will be March 31, 2020. After that date, adoption of a pre-approved § 403(b) plan will no longer give an employer retroactive relief for qualification defects which arose since 2010. Revenue Ruling 2013-22 indicated that a six-year cycle would apply to pre-approved § 403(b) plans. While it is not clear whether the second cycle would also end on exactly March 31, there will likely not be another opportunity to adopt a pre-approved plan to fix past errors until about 2025 or 2026. And even then, adoption of a pre-approved plan would likely not provide retroactive relief for periods before 2020.
Obtaining an IRS advisory or opinion letter is not legally required, so long as a plan (in form and operation) complies with § 403(b). However, as a practical matter, an employer will typically want to adopt a pre-approved § 403(b) plan with an IRS letter verifying its status, since one of the major advantages of a pre-approved plan is the opportunity to get IRS blessing on the plan.
Based on both campaign promises and Donald Trump’s plans for his first 100 days, a Trump presidency is likely to make major changes in employee benefits law. The most significant ones are likely to be:
- Major changes in the Affordable Care Act (although the timing and extent of such changes are unclear), combined with expansion of health savings accounts.
- Postponement or elimination of the recently issued Department of Labor fiduciary regulations.
- Loosening of executive compensation rules.
- Further cutbacks in IRS guidance and audit activity.
- Increased hostility to consideration of noneconomic factors in selecting retirement plan investments.
- Diminished enforcement of protections for LGBT employees.
- Increased activity at the state level, including establishment of state-sponsored retirement plans for private employers.
These issues, and others of less general concern, are discussed below. Read more.
As previously discussed, faced with substantial budget cuts, the Internal Revenue Service (“IRS”) has announced that it is eliminating most determination letters (letters concerning the qualified status of retirement plans, which gives rise to numerous tax benefits), effective December 31, 2016. (Announcement 2015-19.) In the past, individually designed retirement plans were able to obtain a determination letter once every five years, during a cycle provided by the IRS. The most likely new regime will involve making determination letters on individually designed plans available only when a plan is first adopted, or when it is terminated. Between those dates, the only way to ensure qualification other than filing a declaratory judgment action with the Tax Court is likely to be to adopt annual updates put out by the IRS that will include model wording for amendments.
For entities that maintain a retirement plan, the new regime may mean that they discover qualification issues only on audit, when it is too late to fix the issue. And the potential penalties on audit (for the employer, the trust under the plan, and the employees) are, as set forth in a prior article, huge. What steps should a plan administrator take to ensure the qualification of a plan after that point? Read more.
On July 21, 2015, the Internal Revenue Service (“IRS”) issued Announcement 2015-19, in which it announced that it would be making substantial changes to the determination letter program intended to allow retirement plan sponsors to ensure that their plans are qualified (eligible for tax benefits). This announcement will affect all retirement plans intended to be qualified, but will create particular issues for plans maintained by governmental employers (“governmental plans”). Read more.
In recent years, the Internal Revenue Service (“IRS”) has been allowing plan sponsors to request determination letters on the qualified status of their retirement plans only during certain periods (cycles). For individually designed governmental plans, such a cycle (Cycle E) opened on February 1, 2015, and will remain open until January 31, 2016. Read more
A “qualified” plan is a retirement plan that meets all of the requirements of Internal Revenue Code section 401(a) to obtain certain tax benefits. There are alternative ways of obtaining favorable tax status for a retirement plan, such as Internal Revenue Code section 403(b) (tax-sheltered annuities and custodial accounts), 457(b) deferred compensation plans, or individual retirement accounts or annuities. The determination letter process applies only to qualified plans.
Prototype (volume submitter) plans designed for adoption by a variety of employers are subject to different deadlines, which vary depending on whether they are defined benefit or defined contribution plans. However, such plans are rare in the governmental context.
The IRS has issued a reminder that governmental plan sponsors who apply for IRS determination letters covering the qualified status of their plans can’t rely on a favorable letter for whether:
- contributions made to the plan are the employer’s “pick-up contributions” (i.e., pretax employee contributions under section 414(h)(2) of the Internal Revenue Code), or
- the plan has a qualified governmental excess benefit arrangement (i.e., a separate trust that provides only a participant’s annual benefit in excess of the limits under Internal Revenue Code section 415).
As of October 9, 2014, the Internal Revenue Service has updated its page on determination letters for governmental plans. The page contains information for any governmental plan considering obtaining an IRS determination letter, including the following: Read more