Code Section 403(b) Tax-Deferred Annuity Plans – Update

Internal Revenue Code (“Code”) section 403(b) tax-deferred annuity plans (“403(b) plans”) are retirement plans for employees of public schools and universities, certain tax-exempt charitable organizations, and churches. 403(b) plans operate in a manner similar, but not identical, to Code section 401(k) plans. Thus, contributions to a 403(b) plan may be made via employee salary deferrals (on a pre-tax or after-tax (including Roth contributions) basis) and employer matching and nonelective contributions. Such contributions, other than after-tax or Roth employee contributions, are not taxable to the plan participant until distributed to the participant at a later date, usually after the participant terminates employment.

403(b) Contribution Limits
The opportunity to make elective salary deferral contributions under a 403(b) plan must be made available generally to all employees eligible to participate in the plan (known as the “universal availability rule”). Favorably, 403(b) plans are not subject, unlike 401(k) plans, to special nondiscrimination testing requirements applicable to elective pre-tax salary deferral contributions. Employer matching contributions and employee after-tax contributions, if such contributions are permitted by the plan, are subject to nondiscrimination testing rules similar to the rules that apply under 401(k) plans. Church-sponsored 403(b) plans are generally exempt from nondiscrimination requirements.

Salary deferral contributions to a 403(b) plan are subject to an annual dollar limit ($18,000 (plus $6,000 in “catch-up” contributions for participants over age 50) for 2017). It is important to note that such dollar limit applies on an individual basis to the aggregate salary deferral contributions made by an employee under all 403(b) plans and 401(k) plans for a calendar year (e.g., where an individual was covered by and contributed to two or more employer 403(b) and/or 401(k) plans for a given calendar year). Thus, such salary deferral dollar limit does not apply on a plan by plan basis. Employer nonelective contributions are subject to the general limit on annual contribution allocations (known as the Code sec. 415 “annual addition” limit). Further, 403(b) plans are funded through annuity contracts issued by an insurance company or a custodial account invested exclusively in mutual funds.

403(b) Plan Documentation
Since 2009, 403(b) plans are required to maintain a written plan document that reflects all applicable legal requirements. 403(b) plan documents, either in the form of a “preapproved plan” document (i.e., prototype or volume submitter plan) or an “individually designed plan,” must be updated periodically to reflect changes in applicable law governing 403(b) plans.

403(b) Plans – Remedial Amendment Period
In accordance with recent IRS guidance (IRS Revenue Procedure 2017-18), sponsors of 403(b) plans, for which a written plan document was adopted by December 31, 2009 or as of its later effective date, will be permitted to adopt plan amendments to correct or update plan terms on a retroactive basis effective as of the later of January 1, 2010 or the plan’s effective date, provided the corrective or updated plan, terms are adopted by the plan sponsor by means of (i) adopting, on or before March 31, 2020, a compliant preapproved 403(b) plan document that has a favorable opinion or advisory letter issued in 2017, or (ii) amending an individually designed 403(b) plan to reflect such corrective or updated plan terms by March 31, 2020. If the time deadline for adopting such retroactive 403(b) plan amendments is not met, the plan will need to be corrected pursuant to the IRS’s voluntary plan correction program (known as the “Employee Plans Compliance Resolution System”), which program generally requires a formal plan filing with the IRS and payment of a compliance fee. It is important to note that currently only prototype and volume submitter 403(b) plans can be submitted to, and approved by, the IRS for compliance in the form of documentation with applicable 403(b) rules. Individually designed 403(b) plans may not be submitted for approval by the IRS.

While there is ample time to retroactively correct noncompliant provisions under a 403(b) plan, it is not too early to review your 403(b) plan document to determine if it reflects all required plan terms and to thereafter periodically review the plan to ensure any future 403(b) plan document changes are adequately and timely adopted. Lastly, it must be remembered that the extended remedial amendment period described above for making 403(b) plan document changes does not extend the otherwise applicable effective date for complying with any such 403(b) plan provisions in operation.