ICI Comments on IRS Program for 403(b) Prototype Plans

Washington, DC, June 1, 2009 - ICI has suggested revisions to clarify an Internal Revenue Service proposal to establish an opinion letter program for 403(b) prototype plans.

Background

When an employer wants to adopt a tax-qualified retirement plan (such as a 401(k) plan), it can receive approval from the Internal Revenue Service (IRS) that the plan meets the requirements of the Internal Revenue Code (IRC). To minimize the cost to the employer to draft and submit a plan to the IRS, the IRS allows submission of “prototype” plan documents by financial institutions and benefit consultants. The IRS reviews the basic plan to determine whether it complies with the tax-qualification requirements. If the form of the document is in compliance, the prototype sponsor will receive a favorable approval letter, or opinion letter, from the IRS.

The IRS has no process in place to allow employers to obtain an opinion letter on a prototype 403(b) plan document. As a result, an employer may have no assurance that the prototype plan it adopts meets the requirements of section 403(b) of the IRC.

On April 14, the IRS released for comment Announcement 2009-34, a draft program for the pre-approval of prototype 403(b) plans. The IRS also posted sample plan language for use in drafting such prototype plans on its website.

ICI submitted a comment letter on June 1, 2009, to outline suggested changes to both the procedure proposed for obtaining an opinion letter and the draft sample plan language.

ICI Position

The draft procedure provides that certain provisions must be included in every 403(b) prototype plan—regardless of the terms of any investment arrangements under the plan—but states that different investment arrangements under the plan may have different features or additional provisions. While ICI welcomes confirmation that differing features and provisions are permitted among the investment arrangements in a 403(b) plan, ICI noted that the sample plan language as drafted does not reflect this sentiment. ICI cautioned that without explicit incorporation of the terms of individual investment arrangements, conflicts between the prototype plan and the investment arrangements are likely to result.

ICI also suggested specific revisions to the sample plan language, such as clarifying certain definitions, clarifying the ability of employers to delegate administrative duties, and allowing the use of vesting schedules in prototype plans. The suggested revisions are indicated in the comment letter with the deleted language crossed out and the proposed new language underlined.