IRS advice for organizations no longer eligible to sponsor 403(b) plans 

March 21:   The recent edition of an IRS online newsletter—Retirement News for Employers (March 18, 2013)—includes advice for 403(b) plan sponsors, including advice for organizations that have lost their tax-exempt status.

The IRS newsletter reports that if an organization has lost its tax-exempt status, it no longer is eligible to sponsor a 403(b) plan, and that upon loss of its tax-exempt status, such an organization:


  • Must stop employer and employee contributions to its 403(b) plan
  • May apply for restoration of the organization’s tax-exempt status
  • Must correct its eligibility failure through the IRS Voluntary Correction Program (VCP) if it allowed contributions to be made to its 403(b) plan after the organization lost its tax-exempt status.

If an organization is no longer eligible to sponsor a 403(b) plan and does not discontinue contributions:


  • It may be required to withhold and pay payroll taxes from the contributions.
  • Plan participants may be liable for additional income tax because the contributions are not tax-deferred.

The March 2013 newsletter further reports that if the IRS reinstates an organization’s tax-exempt status prospectively—but not retroactively—the organization is to make a VCP submission if any type of contributions were made to the 403(b) plan while the organization was not exempt.


If the IRS retroactively reinstates its tax-exempt status, there is no need to make a VCP submission.


The IRS newsletter also provides a hyperlink to the IRS’s new 403(b) Fix-It Guide, intended to help organizations find, fix, and avoid 403(b) plan errors.



For more information, contact:


Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax)

+1 (202) 533-3084





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