403(b) Rescue, the Ekon Benefits 403(b) Fix-It Series, describes the most common mistakes in 403(b) plans as determined by the IRS. We provide explanations of common mistakes, suggested prevention methods, and options for correction.

Common Mistake #1: The Organization is Not Eligible to Sponsor a 403(b) Plan

A 403(b) plan, also referred to as a tax-sheltered annuity plan or TSA, is a type of retirement savings plan available to public schools and certain 501(c)(3) tax-exempt organizations.  However, eligibility to sponsor or participate in a 403(b) plan is limited to specific employers and employees. Who May Sponsor a 403(b) Plan?

• 501(c)(3) tax-exempt organizations — including charitable, religious, and educational institutions. While many 501(c)(3) organizations obtain an IRS determination letter, this is not required if the organization otherwise qualifies as tax-exempt under IRS rules.
• Public schools and educational institutions — including public elementary and secondary schools, state colleges, and universities. Eligible employees typically include teachers, administrators, support staff, and custodial workers. Board members, trustees, and elected or appointed officials are generally not eligible to participate unless they are also common-law employees.

If an employer has been sponsoring a 403(b) plan but does not meet the eligibility requirements, the error is considered an employer eligibility failure. The Voluntary Correction Program, VCP, should be used to correct. To preserve tax-deferred status of previous contributions, stop all future contributions immediately and retain the assets in the Plan. A VCP submission must be filed with the IRS. Under Rev. Proc. 2021-30, this type of failure is not eligible for Self-Correction and must be addressed through a VCP filing with the IRS.

Often, this mistake is made by organizations which have had a recent change in structure such as being purchased by a for-profit organization. To prevent this error, be mindful of any structural changes in the organization that may lead to ineligibility, confirm eligibility with legal counsel or a TPA before plan adoption, and maintain documentation showing your organization’s ongoing 501(c)(3) or public education status.

For a complete listing of the most common 403(b) mistakes, please visit the IRS 403(b) Plan Fix-It Guide. For assistance in correcting a plan error, please contact Ekon Benefits at (314)367.6555 or info@ekonbenefits.com