The Internal Revenue Service (‘IRS’) has begun auditing the 2009 plan year of 403(b) plans and has announced an interim procedure for correcting plan document failures in connection with their field audit program.  This procedure will remain in place until IRS finally issues the much promised update to its Employee Plans Compliance Resolution System (‘EPCRS’), which will include a correction procedure for 403(b) plan document failures. 

As we wrote in our Benefits Alert of June 13, 2011, although 403(b) operational and demographic failures can be resolved through EPCRS, 403(b) plan sponsors are prohibited from correcting document failures, including the failure to have adopted a written plan document by December 1, 2009, and obtaining relief from adverse tax consequences through the program.  Under the interim procedure announced on February 3rd, the IRS will allow plan sponsors to correct plan document failures found during an audit under the voluntary correction process rather than under the much more expensive Audit Closing Agreement Program.  Thus, plan sponsors will be able to bring their plan documents into compliance for a relatively small fee as opposed to a large penalty.   

We recommend, as we have previously, that a 403(b) plan sponsor that discovers a problem with their plan document or who has not yet adopted a plan document correct the failure immediately and not wait for IRS’ update of the EPCRS program as IRS will consider ‘good faith’ efforts to comply in determining whether to assess penalties during an audit and in negotiating a correction under EPCRS once that program is open.