Coming Soon to Your 403(b) Plan: IRS Determination Letters

Seyfarth Synopsis: In November 2022, the Internal Revenue Service (IRS) announced in Revenue Procedure 2022-40 an expansion to its Determination Letter Program which for the first time will permit individually-designed 403(b) plans to apply for a favorable determination letter. The Revenue Procedure also made some modifications impacting the remedial amendment period and clarifications regarding determination letters for qualified 401(a) plans, which are discussed in a separate Legal Update here.

Until this time, sponsors of individually-designed 403(b) plans have not been permitted to apply for an IRS favorable determination letter. Rather, the IRS permitted sponsors of only individually-designed 401(a) retirement plans (including 401(k) plans) to apply for favorable determination letters; individually-designed 403(b) plans were not permitted to apply for such letters. Sponsors who wanted their 403(b) plans to be approved by the IRS were limited to adopting a pre-approved 403(b) plan sponsored by a plan vendor. Revenue Procedure 2022-40 now provides opportunities for sponsors of individually-designed 403(b) plans to apply for a favorable determination letter from the IRS under the following circumstances: (1) an initial determination; (2) a determination upon plan termination; and (3) a determination upon certain other circumstances to be identified by the IRS in future guidance. 

Determination Letter Application for an Initial Plan Determination

Revenue Procedure 2022-40 permits sponsors of individually-designed 403(b) plans to apply on IRS Form 5300, Application for Determination for Employee Benefit Plan, for an initial favorable determination letter on the plan. An application will be considered a request for an initial plan determination if the plan has not previously filed for a determination letter specifically on IRS Form 5300 and has not been issued a determination letter as an individually-designed plan. Form 5300 is the same form that is used by 401(a) plans for a determination letter application, and this criterion for eligibility pertains to both 403(b) and 401(a) plans.

Because individually-designed 403(b) plans have not previously been eligible to submit determination letter applications, most individually-designed 403(b) plans will be eligible to submit a determination letter application for an initial determination even if they have been in existence for several years.

Because so many individually-designed 403(b) plans will now be eligible to file, to avoid a logjam the IRS established a staggered schedule under which applications for an initial determination may first be submitted, based upon the last digit of the plan sponsor’s employer identification number (EIN). The staggered schedule is as follows:

 

If the EIN of the plan sponsor ends in:	Determination letter application may first be submitted on:
1, 2 or 3	June 1, 2023
4, 5, 6 or 7	June 1, 2024
8, 9 or 10	June 1, 2025

There is no deadline for a permitted initial determination filing.

Application for a Determination Upon Plan Termination

Revenue Procedure 2022-40 also permits sponsors of individually-designed 403(b) plans to apply on IRS Form 5310, Application for Determination for Terminating Plan, for a favorable determination letter upon plan termination.

An application for a determination upon plan termination must be filed no later than the later of: (1) one year from the effective date of the termination; or (2) one year from the date on which the action terminating the plan is taken. However, if plan assets have been fully distributed from a plan for more than 12 months, then the plan will not be eligible to submit a determination letter application regarding the termination.

Applications by sponsors of individually-designed 403(b) plans for a determination upon plan termination may first be submitted on June 1, 2023.  No staggered schedule applies.

Application for a Determination upon Certain Other Circumstances

For the 2023 calendar year, the IRS will permit sponsors of individually designed 403(b) plans to apply for a favorable determination only for an initial plan determination or a determination upon plan termination. However, Revenue Procedure 2022-40 provides that the IRS will annually consider whether to permit sponsors of individually-designed 403(b) plans to apply for a favorable determination letter upon circumstances other than these two reasons. 

Sponsors of individually-designed qualified 401(a) plans (such as a 401(k) plan) currently are permitted to apply for a favorable determination letter on Form 5300 if the application is for a determination upon a plan merger. The Revenue Procedure does not permit sponsors of individually-designed 403(b) plans to apply for a determination upon a plan merger, but perhaps the “certain other circumstances” mentioned above will later be expanded to include plan mergers.

Proceed With Caution

Before taking advantage of this new filing opportunity for an initial determination letter, sponsors of individually-designed 403(b) plans should consult legal counsel to carefully review plan documents and ensure operational and documentary compliance. If the IRS identifies form defects or operational failures upon reviewing a determination letter application, certain Employee Plans Compliance Resolution System (EPCRS) programs will no longer be available to the plan and certain correction methods may require fees. For example, if an operational failure is identified by the IRS upon reviewing a determination letter application, a plan will not be able to submit a Voluntary Correction Program application and the IRS may require the plan to enter into a Closing Agreement to correct the failure, which will impose a fee on the plan sponsor. Given that 403(b) plans have not previously been eligible to receive favorable determination letters and that many 403(b) plans have been established for decades, plan sponsors should consult legal counsel before submitting a 403(b) plan for a determination letter.

Please reach out either to the authors of this Legal Update or to your Seyfarth Employee Benefits attorney if you need additional information.