What to do with your 403(b) plan with a loss of tax-exempt status

Losing or not qualifying for tax exemption under 501(c)(3) is stressful for a lot of reasons. But if you have a 403(b) plan, you want to be sure that the plan doesn’t fall victim to an ‘eligibility failure’ and start treating your employees’ pre-tax contributions as taxable income. If your organization finds itself in this position, you can use the Voluntary Correction Program (VCP) to get back on track.

It’s important that you be proactive in contacting the IRS about the eligibility discrepancy. You’ll need to fill out Appendix F (Streamlined VCP Submission), Schedule 6 (Employer Eligibility Failure 401(k) and 403(b) Plans Only) and pay a fee to maintain the tax benefits, but the fee is not significant. Then, the assets can be transferred to another type of plan.