Starting in 2023, tax-exempt employers like schools, churches, governments, and other not-for-profit organizations can request an IRS determination letter for their 403(b) plans for the first time. A determination letter with a favorable opinion provides reasonable assurance that the plan is operating correctly and can maintain its tax-advantaged status. Previously, the option to request a determination letter was only available to other qualified plans, like 401(k) and defined benefit plans. This change is welcome news for 403(b) plan sponsors seeking the reassurance plan determination letters provide. To help clients, prospects, and others, Smith Schafer has provided a summary of the key details below.
About Revenue Procedure 2022-40
The IRS laid out its changes to the plan approval program in Rev. Proc. 2022-40 in November 2022 impacting both 403(b) and 401(a) plans. These types of plans can request determination letters regardless of when adopted using Form 5300.
To be eligible, 403(b) and 401(a) plans must not have previously received or requested a determination letter. Pre-approved plans are ineligible unless the employer made substantial changes to the IRS template or substantial plan amendments such that the plan documents no longer reflect pre-approved language.
As part of the determination letter review, the IRS will consider whether changes in law and required plan amendments are reflected properly. Employers have two years to implement required plan amendments.
Employers can begin to request a determination letter based on their employer identification number (EIN). It’s a phased-in approach.
- June 1, 2023: EIN ends with 1, 2, or 3
- June 1, 2024: EIN ends with 4, 5, 6, or 7
- June 1, 2025: EIN ends with 8, 9, or 10
Also starting on June 1, 2023, employers may request a determination letter to terminate the plan using Form 5310. Determination letter requests for plan terminations must be submitted within 12 months of when all assets are substantially distributed, or action has been taken to terminate the plan.
Why Request a Determination Letter?
In many cases, a determination letter isn’t required. Employers choose to request one with the intention of receiving a favorable opinion, which means the plan is operating in accordance with all current rules and regulations. Letters don’t have an expiration date, but if the plan makes significant changes to the plan document, the favorable opinion in the determination letter cannot be relied upon.
There are other situations where a determination letter may be required, including when two or more plans merge, significant plan amendments are made, or when a plan is terminated. Currently, only 401(a) plans are eligible to submit determination letters for merged plans.
Tips and Considerations for Making a Determination Letter Request
Before it’s time to request a determination letter, employers should be aware of a few items.
- 403(b) and 401(a) plan sponsors should plan to consolidate all attachments for Form 5300 into a single PDF, as the website cannot support multiple PDF attachments.
- The PDF size cannot exceed 15MB. This may mean that certain attachments need to be edited to reduce the file size, or if necessary, the entire application can be faxed to the IRS instead.
- 401(a) plans do not need to request a determination letter every year to cover all state-level pension law changes.
- Small organizations without an EIN need to request an EIN through the IRS website before filing Form 5300; social security numbers cannot be used.
- Employers should also be aware that if a plan has more than 25 participants, Form 5300 is open for public inspection.
A participant is defined as an eligible employee, even if that employee doesn’t make elective deferrals; retirees and other former employees who still have benefits in the plan; and a deceased employee’s beneficiary who is or will be receiving benefits. If a deceased employee had more than one designated beneficiary, the plan must only include one beneficiary for the purpose of calculating the number of plan participants.
Employers should also be aware that private letter rulings and determination letters are different. From the IRS: “A determination letter provides reliance on the form of the plan. A private letter ruling interprets and applies the tax laws to a taxpayer’s specific set of facts but does not generally address the terms of a plan.” There may be instances where one or both letters would be necessary.
Since 403(b) plans haven’t been allowed to request a determination letter before, most will qualify. Exceptions would be if the plan is already pre-approved; that is, if the plan sponsor used standard templates from the IRS, or if the plan had already received a determination letter from the IRS.
Before requesting a determination letter, it’s important for plan sponsors to check that the plan is operating in accordance with all laws and regulations. Employers can usually self-correct if they find the error themselves, but if the IRS finds an error through a review, the process of remediation is more complicated and costly – and the plan’s tax-advantaged status can be in jeopardy.
The recently announced change is good news for Minnesota 403(b) plan sponsors that can benefit from a determination letter. If you have questions about the information outlined above or need assistance with a benefit plan audit, Smith Schafer can help. We look forward to speaking with you soon.