The IRS recently issued Revenue Procedure 2022-40, which permits the submission of determination letter applications for “individually designed” 403(b) plans used by certain public schools, churches, and charities. Beginning June 1, 2023, plan sponsors maintaining individually designed 403(b) plans will be able to request a determination letter for initial plan qualification, upon plan termination, or for other limited circumstances to be announced by the IRS.
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Background
The Internal Revenue Service (IRS) has had a determination letter program for qualified retirement plans such as 401(k) plans, however a similar program did not exist for individually designed 403(b) plans. Revenue Procedure 2022-40 modifies Revenue Procedure 2016-37 by creating a determination letter program for individually designed 403(b) plans.
New determination letter program
Under Revenue Procedure 2022-40, a plan sponsor is permitted to submit to the IRS a determination letter application for an individually designed 403(b) plan for an initial plan determination, for a determination upon plan termination, and in certain other circumstances to be identified by the IRS in future guidance.
The Revenue Procedure provides guidance and examples to help plan sponsors determine whether a plan is eligible to apply for an initial plan determination.
The date on which an application may be submitted for an initial plan determination will be staggered over three years (June 1, 2023, June 1, 2024, and June 1, 2025) based on the last digit of the plan sponsor’s employer identification number (EIN).
| If the EIN of the plan sponsor ends in: | A determination letter application may be submitted beginning on: |
| 1, 2, or 3 | June 1, 2023 |
| 4, 5, 6 or 7 | June 1, 2024 |
| 8, 9, or 0 | June 1, 2025 |
Applications for a determination letter upon plan termination generally must be filed by 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, but in no event later than 12 months from the date of distribution of substantially all plan assets in connection with the plan termination.
Scope of plan review
Revenue Procedure 2022-40 establishes the scope of the review by the IRS for determination letter applications submitted for individually designed plans. Under the new guidance, the IRS will generally consider qualification requirements and section 403(b) requirements that are in effect or have been included on a Required Amendments List on or before the last day of the second calendar year preceding the year in which the application is submitted. For example, for a 403(b) plan that submits an application before the end of 2026, the IRS will consider the requirements that are included on the Required Amendments Lists for 2024 and prior years.
The IRS will also review any other qualification requirements and section 403(b) requirements that are not included on a Required Amendments List, but that were in effect on or before the last day of the second calendar year preceding the year in which the application is submitted.
For terminating plans, the review will include any amendments required to be adopted to reflect qualification requirements or 403(b) requirements that apply as of the date of termination, regardless of whether they are included on a Required Amendments List.
Remedial amendment periods
Revenue Procedure 2022-40 also modifies the remedial amendment periods for individually designed 403(b) plans. For example, for a disqualifying provision or form defect in a new non-governmental plan, the remedial amendment period expires on the last day of the second calendar year following the calendar year in which the plan was put into effect.
Further guidance forthcoming
Additional procedural requirements, forms and updates regarding this new determination letter program will be issued by the IRS in future guidance.
It should be noted that Revenue Procedure 2022-40 does not modify or restate the provisions relating to qualified preapproved plans. The Department of Treasury and the IRS have indicated that they also anticipate updating the provisions of applicable IRS guidance relating to qualified preapproved plans.
In closing
Although determination letters are not required by law, there are advantages to applying for one. Receipt of a favorable determination letter signifies that the IRS has confirmed that the plan document is up-to-date and in compliance with the requirements of the Internal Revenue Code, the regulations thereunder, and certain other guidance issued by the IRS. A favorable determination letter confirming a plan’s tax-qualified status could prove to be very valuable in the event of an IRS audit.
Buck comment. Given the advantages of receiving a favorable determination letter from the IRS, plan sponsors of individually designed 403(b) plans may want to consider filing for a determination letter in accordance with the new program. Reviewing the guidance and examples provided in Revenue Procedure 2022-40 should assist plan sponsors in understanding when they can apply for an initial determination for their plan.
Volume 45 | Issue 34