On October 21st, the IRS announced changes to its qualified plan determination letter program. Most notably, the program has been expanded to include section 403(b) tax-sheltered annuity plans (“403(b) plans”). Although 403(b) plans are similar to tax-qualified defined contribution plans (“401(a) plans”), they are subject to unique rules, and, until now, the IRS has not offered a determination letter program for individually designed 403(b) plans.  While not the focus of this blog post, the IRS also harmonized and extended certain “remedial amendment periods” across individually designed 401(a) and 403(b) plans and updated and restructured certain related definitions.

Why Get a Determination Letter?

Like 401(a) plans, 403(b) plans must satisfy detailed requirements in both form and operation.  A failure to comply with either the form requirements or the operational requirements would result in loss of favorable tax treatment—which means that tax-deferred account balances under the 403(b) plan would be subject to immediate income tax, as well as interest and potential penalties.  The determination letter program provides important protection against this untenable result.  Under the program, the IRS reviews the plan document and decides whether the form requirements are satisfied.  (The IRS does not review operations under the program.)  If the determination is favorable, the IRS is generally precluded from subsequently disqualifying the plan based on a form violation or for administering the plan in accordance with the terms of the approved document.

Given the myriad technical requirements for a plan document, the benefit of an IRS determination cannot be understated.  Word of caution, though: the IRS reserves the right to impose sanctions (penalties) if it discovers a violation during the determination process.  Plan sponsors should review the plan documents carefully before requesting the determination; errors that are identified before submission can be corrected under the IRS’s Voluntary Correction Program.

Details of the Determination Letter Program Expansion to 403(b) Plans (Rev. Proc. 2022-40)

As noted above, the IRS has expanded the determination letter program to include 403(b) plans. To protect against the IRS being overwhelmed, the window to request a determination is limited:

  • Plan sponsors can apply only for an initial determination, a determination following a plan merger, or a determination upon the termination of a 403(b) plan.
  • Generally, an initial determination is permitted only for plans that have not received a determination as an individually designed plan, and sponsors may apply on a rolling basis based on their employer identification number (“EIN”). For plans sponsored by employers with EINs that end in 1, 2, or 3, applications may be submitted on or after June 1, 2023; for plans sponsored by employers with EINs that end in 4, 5, or 6, applications may be submitted on or after June 1, 2024; and for plans sponsored by employers with EINs that end in 7, 8, 9, or 0, applications may be submitted on or after June 1, 2025. The Revenue Procedure does specify a deadline for applying.
  • Plan sponsors may also seek a determination letter following a plan merger. As with 401(a) plans, the plan merger would need to occur by the end of the first plan year after the applicable corporate merger, acquisition, or other similar business transaction, and the determination letter application must be filed by the end of the first plan year that starts after the plan merger.

Rev. Proc. 2022-40 also includes caveats regarding limitations on the scope of IRS review and the purposes for which a plan sponsor may rely on the determination letter, which are similar to those that apply to 401(a) plans.  The guidance also says that the IRS will not express an opinion on any issues arising from a plan’s coverage of employees outside the sponsor’s controlled group (i.e., the determination will not cover issues related to being a multiple employer plan). As with other determination letter applications, plan sponsors will need to furnish notices to interested parties during the 10-24 day period before a determination request is filed.

In announcing Rev. Proc. 2022-40, the IRS also said to expect more changes to the general determination letter program procedures in 2023.

Proskauer Perspective

This announcement is a significant and welcome development for 403(b) plan sponsors. Given the myriad technical form requirements for a plan, there is always a risk that an IRS audit might reveal a latent, but disqualifying, error in the plan document.  The determination letter program offers important protection against that risk.

In addition to the protection against audit risk, the market may begin to expect that a 403(b) plan has a favorable determination letter. While determination letters are not technically required, auditors, investment managers, and transaction partners often request favorable determination letters as part of their diligence process.  Not having one could put the sponsor in the difficult position of having to make representations about compliance without the benefit of assurance from the IRS.

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Photo of Seth Safra Seth Safra

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined…

Seth J. Safra is chair of Proskauer’s Employee Benefits & Executive Compensation Group. Described by clients as “extremely knowledgeable, practical, and strategic,” Seth advises clients on compensation and benefit programs.

Seth’s experience covers a broad range of retirement plan designs, from traditional defined benefit to cash balance and floor-offset arrangements, ESOPs and 401(k) plans—often coordinating qualified and non-qualified arrangements. He also advises tax-exempt and governmental employers on 403(b) and 457 arrangements, as well as innovative new plan designs; and he advises on ERISA compliance for investments.

On the health and welfare side, Seth helps employers provide benefits that are cost-effective and competitive. He advises on plan design, including consumer-driven health plans with HSAs, retiree medical, fringe benefits, and severance programs, ERISA preemption, and tax and other compliance issues, such as nondiscrimination and cafeteria plan rules.

Seth also advises for-profit and non-profit employers, compensation committees, and boards on executive employment, deferred compensation, change in control, and equity and other incentive arrangements. In addition, he advises on compensation and benefits in corporate transactions.

Seth represents clients before the Department of Labor, IRS and other government agencies.

Seth has been recognized by Chambers USA, The Legal 500, Best Lawyers, Law360, Human Resource Executive, Lawdragon and Super Lawyers.

Photo of Katrina McCann Katrina McCann

Katrina E. McCann is a senior counsel in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Katrina advises a diverse group of clients on a broad spectrum of employee benefits matters, including:

  • counseling clients with respect to

Katrina E. McCann is a senior counsel in the Tax Department and a member of the Employee Benefits & Executive Compensation Group.

Katrina advises a diverse group of clients on a broad spectrum of employee benefits matters, including:

  • counseling clients with respect to the design, drafting, implementation and ongoing qualification of their qualified plans in both the single and multi-employer context, including profit sharing, money purchase, 401(k), ESOP, and defined benefit plans;
  • providing counsel on the establishment, administration and continued legal compliance of health & welfare plans and programs;
  • advising tax-exempt organizations regarding their 403(b) plans and 457 arrangements;
  • creating and advising on non-qualified plans, including deferred compensation and supplemental employee retirement plans;
  • providing technical and practical advice on compliance with ERISA, the Internal Revenue Code, the Affordable Care Act, COBRA, HIPAA, and other laws affecting employee benefit plans, as well as issues concerning plan administration, qualification requirements, correction of plan document failures, fiduciary issues and prohibited transaction issues;
  • routinely working with clients and their service providers, advising on the RFP process, reviewing provider arrangements and collaborating to develop effective and compliant disclosures, government reporting forms and participant communications;
  • analyzing the employee benefits and executive compensation issues in connection with corporate transactions, advising on withdrawal liability matters and structuring benefit plans following a transaction and providing counsel with respect to all aspects of benefit plan mergers; and
  • advising both employers and senior executives in connection with various executive compensation matters, including the negotiation and drafting of equity plans and awards, employment agreements, severance agreements and other compensation arrangements.

Katrina is a member and former co-chair of Proskauer Women’s Alliance Steering Committee and serves on the Firm’s Reproductive Rights Steering Committee. She is also a Board member of Playwrights Horizons, an off-Broadway theater dedicated to the development of contemporary American playwrights and the production of innovative new work, and a Board member of the Axe-Houghton Foundation.

Prior to joining Proskauer, Katrina served as Special Assistant to the Mayor’s Office of Pension and Investments and was Special Assistant Corporation Counsel, Pensions Division, New York City Law Department. While in law school, Katrina was the Robert M. LaFollette/Keenan Peck Legal Fellow, serving in the offices of Senator Herb Kohl & the United States Senate Committee on the Judiciary.

Photo of Jesse T. Foley Jesse T. Foley

Jesse T. Foley is a labor associate and a member of the Employee Benefits & Executive Compensation Group.

Jesse has a diverse practice advising multiemployer and single-employer clients on all aspects related to the legal compliance and tax qualification of ERISA-covered pension and…

Jesse T. Foley is a labor associate and a member of the Employee Benefits & Executive Compensation Group.

Jesse has a diverse practice advising multiemployer and single-employer clients on all aspects related to the legal compliance and tax qualification of ERISA-covered pension and welfare plans, including the treatment of such plans in corporate financings and transactions.

In his multiemployer practice, he represents a number of funds, counseling Boards of Trustees on issues such as healthcare compliance, cybersecurity, government investigations, benefit suspensions, special financial assistance, and withdrawal liability.

In addition, Jesse advises private, public, and not-for-profit employers on all aspects of their non-qualified executive compensation arrangements.  Jesse regularly provides technical and practical advice on the establishment, administration, and continued legal compliance of deferred compensation and supplemental employee retirement plans.  As part of his practice, Jesse routinely negotiates and drafts equity plans and awards, employment agreements, severance agreements, and other compensation arrangements.

Jesse earned his J.D. degree from the University of Southern California, where he was a Senior Editor of the Southern California Law Review.  Jesse also frequently contributes to Proskauer’s Employee Benefits & Executive Compensation Blog.