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The IRS Determination Letter Approval Procedures for 403(b) Plan

A list of required changes for Section 403(b) plans was published in a notice by the Internal Revenue Service.

A 403(b) plan, commonly known as a tax-sheltered annuity plan, is a retirement program for specific public school employees, personnel at specific Section 501(c)(3) tax-exempt organizations, and specific ministers.

What is the 403(b) Plan?

Employees may contribute a portion of their pay to a 403(b) plan.

The 2022 required amendments list, which the IRS published on Monday in Notice 2022-62, identifies the changes to Section 403(b) requirements for both qualified individually designed plans, as well as the end of the remedial amendment window and the deadline for plan amendments.

According to the Employer Identification Number, the new regulation will be implemented gradually. Beginning on June 1, 2023, sponsors having an EIN that ends in 1, 2, or 3 may request determination letters.

The deadline for people with a final number of 4, 5, 6, or 7 is June 1, 2024, and the deadline for those with a final number of 8, 9, or 0 is June 1, 2025. Starting on June 1, 2023, participants in 403(b) plans that are being terminated may ask for a plan termination letter without respect to their EIN.

Robert Abramowitz, an employee benefits lawyer, and partner at Morgan Lewis claims that determination letters are frequently utilized by qualified retirement plans to request official clearance from the IRS.

Although these letters are not required by law, larger plan sponsors of 401(a) eligible retirement plans typically use them. Because the sponsor can rely on prior IRS approval, these letters serve as insurance against IRS audits and legal issues with the plan’s design.

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Plan Determines if Taxpayers May Face Issues

IRS- Section 403(b) plans -2022
A list of required changes for Section 403(b) plans was published in a notice by the Internal Revenue Service.

It also enables a sponsor to identify a problem quickly and disclose it to the IRS before making significant investments in a defective plan. Additionally, occasionally a sponsor will be required to obtain or share their determination letter as a condition of service by a third party, such as a creditor.

The 403(b) plan determination letter procedure is now accessible via Revenue Procedure 2022-40. For 403(b) plans, Abramowitz describes it as a huge adjustment and a move to their benefit. The plan adoption procedure will become more streamlined and resemble the procedures for qualified retirement plans, such as 401(k) plans.

Individually created 403(b) plans could not previously receive formal IRS approval, according to David Ashner, an employee benefits lawyer with Groom Law Group.

Although this is excellent news for many, Abramowitz warns that those sponsors of long-standing 403(b) plans who request decision letters may have long-standing issues exposed during the process.

Sponsors of more well-known programs are cautioned to be careful with their requests, he advises. To avoid dealing with issues in the future, Ashner notes that sponsors often desire determination as part of the initial plan adoption.

According to Ashner, a lot of 403(b) sponsors are organizations like universities, which frequently have highly original plans that date back decades. There should be a lot of interest in obtaining determination letters because this move is something that 403(b) sponsors have long desired.

The modification, as per Ashner, also enables 403(b) sponsors to request determination letters when ending a 403(b) plan. This enables them to obtain the IRS’s consent to appropriately close out a plan.

Even though it’s uncommon, according to Ashner, if a plan is terminated and the IRS later concludes that it wasn’t eligible, the sponsor and participants may be subject to harsh tax implications because the plan would no longer be seen as tax advantageous.

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