IRS Expands 401(k) Tax-Favored Approval Process to 403(b)s

The Treasury Department and Internal Revenue Service said Monday that 403(b) retirement plans — used by certain public schools, churches and charities — can apply for the same tax-favored treatment as qualified retirement plans like 401(k)s and use the same regulatory process as these plans starting in June 2023.

In Revenue Procedure 2022-40, the IRS details the expansion of the determination letter program, which is the process through which different types of plans can get IRS approval for tax-favored treatment. The IRS document also spells out other changes affecting individually designed retirement plans. 

J. Mark Iwry, the head of national retirement policy during the Obama-Biden administration who’s now a non-resident senior fellow at the Brookings Institution in Washington, told ThinkAdvisor Monday in an email that the new IRS guidance allows 403(b) plans “sponsored by schools and charities to apply for IRS approval letters, starting in 2023, even if the plan is individually designed for a particular employer rather than conforming to the text of a standard document that was ‘pre-approved’ by the IRS.”

The IRS determination letters, Iwry continued, “give assurance to a plan sponsor that its retirement plan meets the various tax law requirements to qualify for tax-favored status.”

Iwry added, “a few years ago, the IRS cut back on the circumstances in which it will give plan sponsors such approval letters (mainly when the plan starts or when it terminates, but not each time it is amended). So although individually designed 403(b) plans will soon be able to apply for these IRS approval letters, just as most other tax-qualified retirement plans have been able to, similar limitations will apply to the circumstances in which the IRS approval letters for the 403(b) plans can be granted.”

The IRS is also taking comments until Feb. 28, 2023, on whether the agency should expand the scope of the determination letter program in the future to cover plans — qualified as well as 403(b) — that would be affected by significant law changes or new approaches to plan design, Iwry notes.

The IRS states that Revenue Procedure 2022-40 contains two key additions for 403(b) retirement plans.

First, it expands  the process for initial plan determination: “Beginning June 1, 2023, 403(b) retirement plan sponsors may submit determination letter applications for all initial individually designed retirement plans based on the sponsor’s Employer Identification Numbers.” (The IRS says more details on the expansion can be found in Section 12 of Revenue Procedure 2022-40.)

Second, the document clarifies terminations: “Beginning June 1, 2023, 403(b) retirement plan sponsors may also request a determination letter upon plan termination on a Form 5310, Application for Determination for Terminating Plan, or at any time thereafter without regard to their EIN.”

The IRS said that Revenue Procedure 2023-4 is in development and will be released in the near future.

It will contain “additional changes to procedural requirements for plan submissions, such as phasing-in mandatory e-submission of determination letter requests. Forms 5300 and 5310 will also be updated to reflect these changes,” according to the IRS.