Workshop 1: Ready, Set, Go? It’s Time for the 403(b) Restatement Period

Susan D. Diehl, QKA, CPC, ERPA

President, PenServ Plan Services, Inc.

Agenda for Today• New 403(b) Pre-Approved Documents• 1st RAP Period for 403(b) Plans• No Process for Individually Designed Plans• New “Program Requirements”• Administrative Appendix• “Recap” Sheet for Amendments• Document restrictions for Church Organizations

403(b) Pre-approved plans

Mass Submitter Lead Plans 22

Word For Word Adopters 460

Minor Modifiers 19

Non-mass Lead Plans 58

Virtually all the opinion and advisory letters were issued on 3/31/17

The All-New Pre-Approved 403(b) Plans

• IRS approval letters were mailed to everyone on March 31, 2017

• RAP (Remedial Amendment Period) begins March 31, 2017 and ends March 31, 2020 (Also the date that all annuity contracts and custodial accounts must be updated)

• All employers will need to sign a pre-approved plan and it will be retroactively restated to 1/1/2010.

The All-New Pre-Approved 403(b) Plans

• Pay attention to the new Administrative Appendix that will be a part of the documents. This also contains the Vendor Attachment.

• The Administrative Appendix will show the IRS and the Employer who is doing what under the Plan.

• There will not be a process for individually designed 403(b) plan documents

New Requirements that go with the Plan document

• New requirement – Administrative Appendix and Vendor Attachment which is now a part of the appendix (see separate sample)

• Some new requirements are “program requirements” meaning the only reference for the changes are in the LRMs for 403(b) plans

Restatements Will be a Challenge!

• Keep in mind many employers will be going from a very short Adoption Agreement to something that will floor them!

• Organizations such as ASBOs will not be updating their documents

• New terminology will be confusing to Employers

• Handholding will be a requirement!

New Requirements that go with the Plan document• New requirement - effective for the year after the year that the

Employer restates their 403(b) Plan – The 415 notice for the special controlled group rule will be an annual notice not a one-time notice.

Examples

– a school teacher maintains a second plan (SEP) for tutoring income

– A doctor who maintains a private practice

New Requirements that go with the Plan document

The “415 rule” now contains an annual notice requirement and is mentioned in the new plan documents. This requirement begins with tax year after the Employer restates their Plan Document – deadline 3/31/2020.

This rule is not new but the annual notice is new. (Decide how this notice will be distributed!)

If a participant in a §403(b) also owns another trade or business that adopts a plan, that individual has one overall limit under §415 between the §403(b) and the other plan.

New Requirements that go with the Plan document

• If the other business plan is a cash or deferred arrangement, the individual has one deferral limit between the §403(b) and the other plan.

Employee deemed to “control” their 403(b) account.

Only applies if they own > 50% of another business.

Excess will ALWAYS be in the 403(b)!

• For example a teacher who has a consulting business and has a plan for themselves.

Doctor’s Plans

Hospital 403(b) Plan

• Deferrals Only

• Doctor, age 52 with 20 years of service participates and contributes:

– $18,000 plus

– $ 6,000 plus

– $ 3,000

Dr. has his own private practice

• Adopts a SEP

• No employees

• Contributes a total of $54,000

The Doctor has a 415 excess which must be removed from the 403(b) Plan. Common error for Doctors, Professors, and Teachers!

The All-New Pre-Approved 403(b) Plans

• One of the most important sections of the new plan will be “reconciliation page”.

• Employers must make sure that this is completed based on what they did in any given year.

• For example, when were loans added; hardship, Roth deferrals

• New features – such as entry dates are brand new BUT may not be what was used prior to the new pre-approved plan

• The deferral rule of “once in always in” is a new interpretation by the IRS

The All-New Pre-Approved 403(b) Plans• One of the most important sections of the new plan will be

“the reconciliation page”!

The “Recap” Page is Critical!

• This page can be used to indicate when and what was amended during 2010 and the year of restatement.

• Self-Correct plan provisions during RAP

• Corrections may include: adding required provisions; and correcting defective provisions

The “Recap” Page is Critical!

Examples

• Non-Compliance in form – Absence of Required provision

• Non-Compliance in form and resulting operation –erroneous provision

• Non-Compliance in form – erroneous discretionary (optional)Provision

The “Recap” Page is Critical!

Relief not available during RAP

• Compliance in form but not in operation

– Plan provides all employees are eligible but in operation excludes employees who work less than 20 hours

– Plan provides a 5% Employer contribution but in operation the employer only made a 4% contribution for years 2010-2015

The All-New Pre-Approved 403(b) Plans

• This restatement will provide reliance to the employer back to 1/1/2010 if the employer (1) signs the document by 3/31/2020; and (2) had a valid 403(b) plan that was adopted by the end of 2009.

• What happens if they did not have a document at the end of 2009? ….

The All-New Pre-Approved 403(b) Plans

• What happens if they did not have a document at the end of 2009? ….

Paperclip Rule• ‘Paperclip Rule’ for Document Failures

– Preamble to the final regs indicates rule; IRS provided the nickname of the ‘paperclip rule’.

– Gather all documents including annuity contracts, mutual fund company custodial agreements; benefit booklets; new hire orientation materials, etc

– All policies and procedures (loan and/or hardship policies)

Paperclip Rule

Once paper clipped…

• Create a document that reflects all of the items that were treated as a part of the plan;

• Correct any operational errors ASAP (this should have been corrected by the end of 2009.

• Check all policies and procedures (loan and/or hardship policies)

Paperclip Rule

Does it work? Maybe!

Current audits of 403(b) plans for 2009 documents permit this rule

Important to make sure you have enough procedures in place and copies of all underlying documents to make this work!

New Requirement for ChurchesLets Review the types of Church/Church Related Organizations - “With” and “Without” a Steeple• Not Subject to ERISA unless they elect. Most are

non-electing church plans• If ERISA election is made, it is irrevocable!• Merely filing a Form 5500 or adopting an ERISA Plan

is NOT an election.• Election is made by filing an irrevocable statement

along with the Form 5500.

Churches with a SteepleIncludes:• Churches, Place of worship• Association of Churches

Unless elects, not subject to ERISA Not subject to nondiscrimination rules Can adopt a 403(b)(9) Investments not limited Can name a “Trustee” Use for Housing Allowance Distributions (special 1099-R reporting and

recordkeeping for rollovers)• Ask for IRS determination letter if available

Churches without a SteepleChurches Without a Steeple include (may not be included in a 403(b)(9)!):

• QCCO (Qualified Church Controlled Org)– For example, a Church School

– Not subject to ERISA (unless they elect) and not subject to nondiscrimination rules

– Primarily funded by the church (more than 25% of their income comes from the church)

Churches without a SteepleChurches Without a Steeple include (may not be included in a 403(b)(9)!):

• Non QCCO (Non-Qualified Church Controlled Org)– For example, a Nursing Home run by the Church. More than 25% of

income comes from non church resources.

– Not subject to ERISA (unless they elect) but they are subject to nondiscrimination rules including the universal availability rule

Churches without a SteepleNot required by law but a “program requirement” for the new pre-approved 403(b) plans –

A 403(b)(9) Plan may not be adopted by a QCCO or NonQCCO, therefore the only option is for them to adopt a regular 403(b) for a “nonelecting church”.

Problem with tearing apart current plans that may have as many as 40,000 employers!

Hopefully this can be corrected before the next restatement

20 Hour Rule/‘Once in Always’ In Rule

History –

- IRS continued to audit based on the individual status’ from year to year after final regs were issued in 2007.

- LRM development – 2009 draft Item #13 unclear on application

- LRM updates in 2013 did not clarify

20 Hour Rule/‘Once in Always’ In RuleHistory –

- LRM Updates in 2015 was first statement for the once in always in rule.

- ACT recommended in 2015 that the IRS address - How the 20 hours per week and 1,000 hours per year rules works in “real life,” practical operation. The communication should stress that employees excluded under the less than 20 hours per week rule must also be tested under the 1,000 hours’ standard.

20 Hour Rule/‘Once in Always’ In Rule

History –

- In Practice Employers have used many different interpretations prior to IRS providing this limited guidance

- Lets look at some examples

‘Once in Always’ In Rule - Variations

Some Employers continued to follow the year by year approach that was most frequently used in IRS examinations

Example –

Ava is hired 7/1/2017 for a position that requires her to work 15 hours per week. Since she is expected to work less than 1000 per year, she is not offered the 403(b) plan.

‘Once in Always’ In Rule - Variations

Ava is a workaholic and in 2018 the Employer realizes that AVA actually worked over 1000 hours in 2017. The Employer now treats AVA as eligible for 2018.

In 2018 Ava works only 900 hours and is therefore not eligible for 2019.

As you can see we would have a “look-back year” type of determination

‘Once in Always’ In Rule - Variations

The other option is that once Ava is eligible (in this case 2018), she would remain eligible for future years as long as she is employed regardless how many hours she actually works.

This would therefore not require the “look-back” rule for hours.

It was not until the IRS webcast of 5/23/2016 when the IRS first addressed this rule and how it may work with no examples.

The IRS webcast of 10/27/2016 provided examples.

But then came the question on rehires…

‘Once in Always’ In Rule - Variations

Some treated the employees as always eligible even if they severed employment and were subsequently rehired. Note, that this now would apparently be incorrect under the specific examples put forth in the webcast of 10/27/2016. (most common approach)

Some used the concept that an employee could again be subject to exclusion from elective deferrals after they were rehired following a severance of employment.

‘Once in Always’ In Rule - Variations

However, the approach probably falls into two categories when evaluating the rehired employee under the reasonably expected to work 1000-hour concept. Only subjecting the rehired employee to meeting the expectation if

they had a break in service

Subjecting the rehired employee to meeting the expectation after any true severance of employment.

Other variations that are presently unknown

20 Hour Rule/‘Once in Always’ In RuleWe have come full circle!

IRS approves 403(b) documents that do not offer these options so… industry requests relief for employers

IRS has agreed to a “page replacement” to add the real meaning of this rules to the pre-approved 403(b).

Once IRS approves language, sponsors will be able to replace that language in your already approved plan documents

Entry Dates for Elective Deferrals

Prior to the new pre-approved plan there was no guidance on entry dates for elective deferrals

Many employers used a 90 day entry based on verbal comments from IRS

Entry Dates for Elective DeferralsNew plan language equates to a 60 day entry as follows:

Within 30 days after commencement of employment employer provides opportunity to defer; and

Permits the participant to make an election up to 30 days after notice is provided

**Problem with employers who used the 90 day entry date in prior years??

403(b) Plan Required ProvisionsA plan must describe all material terms and conditions regarding:

1. Eligibility, 2. Contributions and benefits, 3. Timing and form of benefit distributions, 4. Including distribution events, hardship withdrawals,

loans, etc.5. Available investment arrangements6. Amendment procedure

A pre-approved prototype or volume submitter plan will have all of these features.

403(b) Plan Required Provisions• Incorporation of Investment Contracts

• Plan must incorporate the terms of the investment arrangements by reference.

• Plan must provide that its terms govern over any inconsistent terms of the investment contracts.

403(b) Plan Required ProvisionsA Plan must contain an Administrative Appendix that:

• Identifies the parties responsible for various administrative functions.

• Lists all investment vendors offered along with noting the type of investment products – annuity/custodial agreement.

• This is a new requirement under the pre-approved program and will make clear to the employer who is doing what OR NOT! Any unmarked items become the responsibility of the Employer.

403(b) Plan Optional FeaturesPlan may include optional features:

– Employer contributions– Roth contributions– Hardship withdrawals– Loans– Acceptance of rollovers– In service withdrawals– “Exchanges” to 403(b) products approved within the plan (for contributions or

just exchanges)– Plan to plan transfers (in or out)– Transfers to State DB plans to purchase service credits– Mandatory Employee contributions (common in public charter schools)

And The ‘Clean Up’ Begins…During the restatement – it will also be a good idea to review:• Procedures for Universal Availability• Employee Handbooks• Post-Employment Contributions• Overall Administration• Review with Employer the Administrative Appendix to

make sure all functions are being handled!

Compliance• Post-Employment Employer Contributions• Universal Availability for Elective Deferrals• Financial Hardship Distributions• Frozen and Terminated Plans• Timely Contribution Remittance/Deposit• Catch-up Ordering Rule• Information Sharing Agreements• Employer Contributions – Unique allocations!

Questions!Thank you all for coming!