IRS Expands Determination Letter Program for 403(b) Retirement Plans

Practical Law Legal Update w-037-5103 (Approx. 5 pages)

IRS Expands Determination Letter Program for 403(b) Retirement Plans

by Practical Law Employee Benefits & Executive Compensation

Rev. Proc. 2022-40 Changes to the Determination Letter Program

In Rev. Proc. 2022-40, the IRS clarifies, modifies, or supersedes:

Rev. Proc. 2016-37, which provided determination letter processes and remedial amendment periods for individually designed qualified retirement plans (see Legal Update, IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37).
Rev. Proc. 2017-41, which restructured and simplified the IRS' procedures for issuing opinion letters regarding the qualification in form of pre-approved plans (see Legal Update, IRS Revises Opinion Letter Procedures for Pre-Approved Plans in Revenue Procedure 2017-41 and Issues 2017 Cumulative List in Notice 2017-37).
Rev. Proc. 2019-20, which provided for a limited expansion of the determination letter program for some individually designed retirement plans, including individually designed statutory hybrid plans and merged plans (see Legal Update, IRS Rev. Proc. 2019-20 Expands Determination Letter Program).
Rev. Proc. 2019-39, which established recurring remedial amendment periods for individually designed and pre-approved Section 403(b) plans to correct form defects first occurring after June 30, 2020 (see Legal Update, IRS Revenue Procedure 2019-39 Establishes Recurring Remedial Amendment Periods for 403(b) Plans).

Determination Letters for Individually Designed 403(b) Plans

Under Rev. Proc. 2022-40, plan sponsors may submit determination letter applications for individually designed Section 403(b) plans. Starting June 1, 2023, determination letter applications may be submitted for:

Initial plan determination.
Determination upon plan termination.
Other circumstances specified by the IRS.

The application date for initial plan determinations, however, will be staggered over a three-year period (June 1, 2023, June 1, 2024, and June 1, 2025) and will be determined by the last digit of the plan sponsor's employer identification number (EIN).

Definition of Form Defect

Rev. Proc. 2022-40 also modifies the definition and structure of form defects set out in Rev. Proc. 2019-39. As modified, "form defect" means:

A provision, or absence of a provision, in a new plan that causes the Section 403(b) plan form to not satisfy the Section 403(b) requirements.
An amendment to an existing plan that causes the Section 403(b) plan form to not satisfy the Section 403(b) requirements.
A plan provision that:
- causes a Section 403(b) plan form to not satisfy the Section 403(b) requirements due to a change in the requirements; or
- is integral to a provision that causes a plan form to not satisfy the Section 403(b) requirements due to a change in the requirements.
The absence of a plan provision that is required by, or integral to, a change in the Section 403(b) requirements.

Remedial Amendment Period

Regarding the remedial amendment period for individually designed qualified and Section 403(b) plans, Rev. Proc. 2022-40:

Incorporates the provisions of Rev. Proc. 2019-39 concerning the start of the remedial amendment period for Section 403(b) plan form defects.
Extends the end of the remedial amendment period for a disqualifying provision concerning a provision, or absence of a provision, in a new qualified plan to the last day of the second calendar year after the calendar year the plan is put into effect.
Extends the end of the remedial amendment period for a disqualifying provision concerning a provision, or absence of a provision, in a new governmental plan to the later of:
- the last day of the second calendar year after the calendar year the plan is put into effect; or
- 90 days after the close of third legislative session of the legislative body that has the authority to amend the plan that begins after the end of the plan's initial plan year.

Plan Sponsor Eligibility

The IRS is updating the determination letter eligibility rules for plan sponsors of individually designed plans. Under Rev. Proc. 2022-40, plan sponsors of individually designed plans may apply for an initial plan determination letter on Form 5300, provided the plan has not already submitted an application on Form 5300 and been issued a determination letter as an individually designed plan. Rev. Proc. 2022-40 also provides examples regarding whether an initial plan determination has already been made.

Scope of IRS Review of Individually Designed Plans

Rev. Proc. 2022-40 also modifies the scope of the IRS's plan review to provide that the IRS will consider in its review qualification requirements and Section 403(b) requirements that are in effect, or have been included in a required amendments list, on or before the last day of the second calendar year before the year in which the determination letter application is submitted (see Practice Note, Revised IRS Determination Letter Program for Individually Designed Qualified Plans: Scope of Plan Review).

Practical Implications

Plan sponsors of 403(b) retirement plans in particular should review the modifications made to the determination letter process in Rev. Proc. 2022-40. As part of the release, the IRS noted that a new Revenue Procedure will be issued in the "near future" containing additional changes for plan submissions, including mandatory e-submission of determination letter requests.

IRS Expands Determination Letter Program for 403(b) Retirement Plans | Practical Law