substantiation of travel expenses

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• EXPENSES & DEDUCTIONS

Substantiation of business expenses: A review of the basics

• Individual Income Taxation
• C Corporation Income Taxation

Editor: Mark G. Cook, CPA, CGMA

Merely paying or incurring an expense is not sufficient to entitle a taxpayer to a deduction under Sec. 162(a). The recent Tax Court case  Sherman,  T.C. Memo. 2023-63, highlights the fact that taxpayers bear the burden of substantiating not only the amount of the deduction but also that the purpose underlying the deduction is ordinary and necessary to operating their trade or business.

Joseph W. Sherman, an emergency medicine physician residing in California and maintaining an apartment in Tacoma, Wash., sought redetermination after the IRS disallowed for lack of documentation or receipts his claimed deductions for expenses of advertising, insurance, legal and professional services, office expense, travel, meals and entertainment, and laundry relating to his medical practice. Ultimately, the court sustained the IRS’s disallowance of the expenses on the grounds that, even if Sherman could document his expenses, he failed to prove that the expenses were ordinary and necessary to his medical practice.

The case provides an opportunity to review the rules surrounding substantiation of business expenses.

Adequate records

All taxpayers are required to keep an accounting of income and expenses under Regs. Sec. 1.446-1. The regulation, not discussed by the court but relevant to the topic here, acknowledges that no uniform method of accounting applies to all taxpayers and leaves the adoption of specific forms and systems to the taxpayer’s judgment.

Though no specific method of accounting is mandated, Regs. Sec. 1.446-1(a)(4) lists the following features as being essential to maintaining records that enable a taxpayer to file a correct return:

(i) Except in the case of a taxpayer qualifying as a small business tax-payer for the taxable year under section 471(c), in all cases in which the production, purchase, or sale of merchandise of any kind is an income-producing factor, merchandise on hand (including finished goods, work in progress, raw materials, and supplies) at the beginning and end of the year shall be taken into account in computing the taxable income of the year. ... (ii) Expenditures made during the year shall be properly classified as between capital and expense. For example, expenditures for such items as plant and equipment, which have a useful life extending substantially beyond the taxable year, shall be charged to a capital account and not to an expense account. (iii) In any case in which there is allowable with respect to an asset a deduction for depreciation, amortization, or depletion, any expenditures (other than ordinary repairs) made to restore the asset or prolong its useful life shall be added to the asset account or charged against the appropriate reserve.

Regs. Sec. 1.446-1(c)(1) lists several permissible methods of accounting:

Cash receipts and disbursements method:  Under this method of computing taxable income, all items constituting gross income (whether in the form of cash, property, or services) are to be included in the tax year in which they are actually or constructively received. Likewise, expenditures are to be deducted in the year payment is made.

Accrual method:  Under this method, income is to be included for the tax year when all the events have occurred that fix the right to receive the income and the income can be determined with reasonable accuracy. Similarly, expenditures are deductible in the tax year in which all events occur that establish the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.

Other permissible methods:  These include special methods of accounting, such as the crop method, the installment method, and other methods described in Chapter 1 of the Code and regulations.

Combinations of the above methods:  A combination method of accounting is permitted if it clearly reflects income and is consistently used.

Sherman was operating his medical practice under the cash receipts and disbursements method of accounting. Thus, he should have kept canceled checks, invoices, credit card receipts and statements, cash register tapes, or other documents reflecting proof of payment, including the name of the payee, the amount paid, date paid, and a description of the item or service received. The IRS determined that Sherman lacked proper documentation of amounts for many expenses claimed on his Schedule C,  Profit or Loss From Business (Sole Proprietorship).

Cohan   rule

Often, in cases such as Sherman’s where documentation of expenses is lacking, a court will consider using the  Cohan  rule to estimate expenses. The landmark case  Cohan,  39 F.2d 540 (2d Cir. 1930), established the use of estimates by a court to determine the amount of expenses allowed when records are incomplete.

George M. Cohan, a music composer, deducted significant travel and entertainment expenses, which on audit were disallowed by the IRS in full for lack of complete documentary evidence. The Board of Tax Appeals (BTA) agreed with the IRS that the deductions should not be allowed because Cohan failed to satisfy his burden of proof for the expenses he had incurred. On appeal, the Second Circuit found that complete denial of the expenses was inappropriate and that “the [BTA] should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent.”

It is important for taxpayers to be aware that use of the  Cohan  rule is discretionary by the courts, and it is not a substitute for keeping adequate records. For the  Cohan  rule to apply, a court must first be persuaded that an ordinary and necessary expense was incurred for a business purpose. Even then, it is not obligatory for a court to estimate the amounts. Additionally, the  Cohan  rule does not apply where specific statutory documentation requirements exist, such as those for travel expenses under Sec. 274(d). Because Sherman had failed to demonstrate his expenses were ordinary and necessary business expenses, the Tax Court held the use of the  Cohan  rule was inappropriate.

Heightened substantiation for travel and meals and entertainment

Several of Sherman’s claimed medical practice expenses were subject to heightened substantiation requirements under Sec. 274(d), the Tax Court explained. These included expenses related to travel while away from home, such as for meals and lodging. Temp. Regs. Sec. 1.274-5T(b)(2) requires the following elements to be proved to substantiate travel expenses:

(i) Amount. Amount of each separate expenditure for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the traveler’s own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares. (ii) Time. Dates of departure and return for each trip away from home, and number of days away from home spent on business. (iii) Place. Destinations or locality of travel, described by name of city or town or other similar designation; and (iv) Business purpose. Business reason for travel or nature of the business benefit derived or expected to be derived as a result of travel.

Temp. Regs. Sec. 1.274-5T(c) outlines best practices for keeping suitable records of travel expenses. Written records are not explicitly required, but far more evidentiary value is given to written versus oral records. Additionally, keeping a record of the necessary elements as close as possible to the time of expenditure has a higher degree of credibility than relying on recall later. A taxpayer relying on recall will need far more corroborative evidence for it to rise to the evidentiary value of a contemporaneous record.

Sherman not only failed to keep a written log of his travel expenses explaining the business reason for travel, but the court found his oral testimony to be generally “self-serving, and, at times, lacking in credibility and candor.” The court sustained the IRS’s disallowance of travel and meal expenses related to Sherman’s medical practice. His claimed deduction for entertainment expenses also failed to meet heightened substantiation requirements.

Ordinary and necessary

Though Sec. 162(a) requires that an expense be ordinary and necessary to a taxpayer’s business to be deductible, the Code section does not define “ordinary and necessary.” The prevailing definition of the terms as they relate to Sec. 162(a) comes from  Welch v. Helvering,  290 U.S. 111 (1933).

Thomas Welch, the former secretary of the bankrupt Welch Co., after obtaining a new job in the same industry, decided to pay the debts of the Welch Co. in an effort to solidify goodwill. Welch deducted the payments made to Welch Co.’s creditors as ordinary and necessary business expenses. The IRS determined that the expenses were not ordinary and necessary but rather akin to capital expenditures. After the BTA agreed with the IRS, the taxpayer appealed to the Eighth Circuit, which affirmed. The Supreme Court agreed to hear the case. Although it affirmed the Eighth Circuit’s decision, the Court acknowledged that expenses can sometimes be ordinary for a business in this sense even if infrequent.

Supreme Court Justice Benjamin N. Cardozo wrote for the Court:

Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack.

As such, a taxpayer need not incur a particular expense regularly and habitually for that expense to nonetheless be ordinary. In fact, an expense incurred once in an individual taxpayer’s lifetime may still be ordinary. Under the specific facts in  Welch,  however, the Supreme Court upheld the lower courts’ determination that Thomas Welch’s voluntary debt payments were not ordinary.

While the  Welch  case turned on the definition of “ordinary,” the Supreme Court also indicated that an expense may be considered “necessary” if it is “appropriate and helpful” for the development of the taxpayer’s business; thus, an expense does not need to be essential to be considered necessary.  Heineman,  82 T.C. 538, 543 (1984), further reinforces that so long as a business purpose exists, an expense can be necessary even if it is not required. A reasonable expectation that the business will benefit from an expense is enough for it to be considered necessary within the context of Sec. 162(a).

Returning to the case involving the emergency medicine physician, the Tax Court ultimately found that Sherman failed to offer documentation, testimony, or other evidence to prove the amount or business purposes of his purported medical practice expenses. There was a “pervasive” lack of substantiation of the alleged expenses, the Tax Court said.

The IRS thus prevailed in reducing Sherman’s claimed expenses for his medical practice. (In a separate portion of the opinion, the Tax Court rejected Sherman’s claims for business deductions related to his film production activities, holding that he did not engage in them with the primary motivation of earning a profit.)

Editor Notes

Mark G. Cook , CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Cook at [email protected] .

Contributors are members of or associated with SingerLewak LLP.

Recent developments in Sec. 355 spinoffs

The research credit: documenting qualified services, income tax treatment of loyalty point programs, tax court rules cancellation of debt is part of gain realization, listing of reportable transactions under the apa.

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

PRACTICE MANAGEMENT

CPAs assess how their return preparation products performed.

26 CFR § 1.274-5T - Substantiation requirements (temporary).

• Table of Popular Names

(a) In general. For taxable years beginning on or after January 1, 1986, no deduction or credit shall be allowed with respect to—

(1) Traveling away from home (including meals and lodging),

(2) Any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity , including the items specified in section 274(e),

(3) Gifts defined in section 274(b), or

(4) Any listed property (as defined in section 280F(d)(4) and § 1.280F –6T(b)), unless the taxpayer substantiates each element of the expenditure or use (as described in paragraph (b) of this section) in the manner provided in paragraph (c) of this section. This limitation supersedes the doctrine found in Cohan v. Commissioner, 39 F. 2d 540 (2d Cir. 1930). The decision held that, where the evidence indicated a taxpayer incurred deductible travel or entertainment expenses but the exact amount could not be determined, the court should make a close approximation and not disallow the deduction entirely. Section 274(d) contemplates that no deduction or credit shall be allowed a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer . For purposes of this section, the term entertainment means entertainment, amusement, or recreation, and use of a facility therefor; and the term expenditure includes expenses and items (including items such as losses and depreciation).

(b) Elements of an expenditure or use —(1) In general. Section 274(d) and this section contemplate that no deduction or credit shall be allowed for travel, entertainment, a gift, or with respect to listed property unless the taxpayer substantiates the requisite elements of each expenditure or use as set forth in this paragraph (b) .

(2) Travel away from home. The elements to be provided with respect to an expenditure for travel away from home are—

(i) Amount. Amount of each separate expenditure for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the traveler's own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil , and for taxi fares;

(ii) Time. Dates of departure and return for each trip away from home, and number of days away from home spent on business;

(iii) Place. Destinations or locality of travel, described by name of city or town or other similar designation; and

(iv) Business purpose. Business reason for travel or nature of the business benefit derived or expected to be derived as a result of travel.

(3) Entertainment in general. The elements to be proved with respect to an expenditure for entertainment are—

(i) Amount. Amount of each separate expenditure for entertainment, except that such incidental items as taxi fares or telephone calls may be aggregated on a daily basis;

(ii) Time. Date of entertainment;

(iii) Place. Name , if any, address or location , and destination of type of entertainment, such as dinner or theater, if such information is not apparent from the designation of the place;

(iv) Business purpose. Business reason for the entertainment or nature of business benefit derived or expected to be derived as a result of the entertainment and, except in the case of business meals described in section 274(e)(1), the nature of any business discussion or activity ;

(v) Business relationship. Occupation or other information relating to the person or persons entertained, including name , title, or other designation, sufficient to establish business relationship to the taxpayer .

(4) Entertainment directly preceding or following a substantial and bona fide business discussion. If a taxpayer claims a deduction for entertainment directly preceding or following a substantial and bona fide business discussion on the ground that such entertainment was associated with the active conduct of the taxpayer 's trade or business , the elements to be proved with respect to such expenditure, in addition to those enumerated in paragraph (b)(3) (i) , (ii) , (iii) , and (v) of this section are—

(i) Time. Date and duration of business discussion;

(ii) Place. Place of business discussion;

(iii) Business purpose. Nature of business discussion, and business reason for the entertainment or nature of business benefit derived or expected to be derived as the result of the entertainment.

(iv) Business relationship. Identification of those persons entertained who participated in the business discussion.

(5) Gifts. The elements to be proved with respect to an expenditure for a gift are—

(i) Amount. Cost of the gift to the taxpayer ;

(ii) Time. Date of the gift;

(iii) Description. Description of the gift;

(iv) Business purpose. Business reason for the gift or nature of business benefit derived or expected to be derived as a result of the gift; and

(v) Business relationship. Occupation or other information relating to the recipient of the gift, including name , title, or other designation, sufficient to establish business relationship to the taxpayer .

(6) Listed property. The elements to be proved with respect to any listed property are—

(i) Amount —(A) Expenditures. The amount of each separate expenditure with respect to an item of listed property , such as the cost of acquisition , the cost of capital improvements , lease payments, the cost of maintenance and repairs, or other expenditures, and

(B) Uses. The amount of each business/investment use (as defined in § 1.280F –6T (d)(3) and (e)), based on the appropriate measure (i.e., mileage for automobiles and other means of transportation and time for other listed property , unless the Commissioner approves an alternative method), and the total use of the listed property for the taxable period.

(ii) Time. Date of the expenditure or use with respect to listed property , and

(iii) Business or investment purpose. The business purpose for an expenditure or use with respect to any listed property (see § 1.274 –5T(c)(6)(i) (B) and (C) for special rules for the aggregation of expenditures and business use and § 1.280F –6T(d)(2) for the distinction between qualified business use and business/investment use).

(c) Rules of substantiation —(1) In general. Except as otherwise provided in this section and § 1.274 –6T, a taxpayer must substantiate each element of an expenditure or use (described in paragraph (b) of this section) by adequate records or by sufficient evidence corroborating his own statement . Section 274(d) contemplates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expenditure or use referred to in section 274. Written evidence has considerably more probative value than oral evidence alone. In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required, but a record of the elements of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence , has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. Thus, the corroborative evidence required to support a statement not make at or near the time of the expenditure or use must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or near the time of the expenditure or use supported by sufficient documentary evidence . The substantiation requirements of section 274(d) are designed to encourage taxpayers to maintain the records, together with documentary evidence , as provided in paragraph (c)(2) of this section.

(2) Substantiation by adequate records —(i) In general. To meet the “adequate records” requirements of section 274(d), a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record (as provided in paragraph (c)(2)(ii) of this section), and documentary evidence (as provided in paragraph (c)(2)(iii) of this section) which, in combination, are sufficient to establish each element of an expenditure or use specified in paragraph (b) of this section. It is not necessary to record information in an account book, diary, log, statement of expense, trip sheet, or similar record which duplicates information reflected on a receipt so long as the account book, etc . and receipt complement each other in an orderly manner.

(ii) Account book, diary, etc. An account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use.

(A) Made at or near the time of the expenditure or use. For purposes of this section, the phrase made at or near the time of the expenditure or use means the element of an expenditure or use are recorded at a time when, in relation to the use or making of an expenditure, the taxpayer has full present knowledge of each element of the expenditure or use, such as the amount , time, place, and business purpose of the expenditure and business relationship. An expense account statement which is a transcription of an account book, diary, log, or similar record prepared or maintained in accordance with the provisions of this paragraph (c)(2)(ii) shall be considered a record prepared or maintained in the manner prescribed in the preceding sentence if such expense account statement is submitted by an employee to his employer or by an independent contractor to his client or customer in the regular course of good business practice. For example , a log maintained on a weekly basis, which accounts for use during the week, shall be considered a record made at or near the time of such use.

(B) Substantiation of business purpose. In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances , a written explanation of such business purpose will not be required. For example , in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required. Similarly, in the case of a business meal described in section 274(e)(1), if the business purpose of such meal is evident from the business relationship to the taxpayer of the persons entertained and other surrounding circumstances, a written explanation of such business purpose will not be required.

(C) Substantiation of business use of listed property —( 1 ) Degree of substantiation. In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in § 1.280F –6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use . However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances . For example , a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number miles driven during the taxable year , the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt , record of delivery, or other documentary evidence .

(2) Written record. Generally, an adequate record must be written. However, a record of the business use of listed property , such as a computer or automobile, prepared in a computer memory device with the aid of a logging program will constitute an adequate record.

(D) Confidential information. If any information relating to the elements of an expenditure or use, such as place, business purpose, or business relationship, is of a confidential nature, such information need not be set forth in the account book, diary, log, statement of expense, trip sheet, or similar record, provided such information is recorded at or near the time of the expenditure or use and is elsewhere available to the district director to substantiate such element of the expenditure or use.

(iii) [Reserved]. For further guidance, see § 1.274 –5(c)(2)(iii).

(iv) Retention of written evidence. The Commissioner may, in his discretion, prescribe rules under which an employer may dispose of the adequate records and documentary evidence submitted to him by employees who are required to, and do, make an adequate accounting to the employer (within the meaning of paragraph (f)(4) of this section) if the employer maintains adequate accounting procedures with respect to such employees (within the meaning of paragraph (f)(5) of this section.

(v) Substantial compliance. If a taxpayer has not fully substantiated a particular element of an expenditure or use, but the taxpayer establishes to the satisfaction of the district director that he has substantially complied with the “adequate records” requirements of this paragraph (c)(2) with respect to the expenditure or use, the taxpayer may be permitted to establish such element by evidence which the district director shall deem adequate.

(3) Substantiation by other sufficient evidence —(i) In general. If a taxpayer fails to establish to the satisfaction of the district director that he has substantially complied with the “adequate records” requirements of paragraph (c)(2) of this section with respect to an element of an expenditure or use, then, except as otherwise provided in this paragraph, the taxpayer must establish such element—

(A) By his own statement , whether written or oral, containing specific information in detail as to such element; and

(B) By other corrobative evidence sufficient to establish such element.

(ii) Sampling —(A) In general. Except as provided in paragraph (c)(3)(ii)(B) of this section, a taxpayer may maintain an adequate record for portions of a taxable year and use that record to substantiate the business/investment use of listed property for all or a portion of the taxable year if the taxpayer can demonstrate by other evidence that the periods for which an adequate record is maintained are representative of the use for the taxable year or a portion thereof.

(B) Exception for pooled vehicles. The sampling method of paragraph (c)(3)(ii)(A) of this section may not be used to substantiate the business/investment use of an automobile or other vehicle of an employer that is made available for use by more than one employee for all or a portion of a taxable year .

(C) Examples. The following examples illustrate this paragraph (c)(3)(ii).

(iii) Special rules. See § 1.274 –6T for special rules for substantiation by sufficient corroborating evidence with respect to certain listed property .

(4) Substantiation in exceptional circumstances. If a taxpayer establishes that, by reason of the inherent nature of the situation—

(i) He was unable to obtain evidence with respect to an element of the expenditure or use which conforms fully to the “adequate records” requirements of paragraph (c)(2) of this section,

(ii) He is unable to obtain evidence with respect to such element which conforms fully to the “other sufficient evidence” requirements of paragraph (c)(3) of this section, and

(iii) He has presented other evidence, with respect to such element, which possesses the highest degree of probative value possible under the circumstances, such other evidence shall be considered to satisfy the substantiation requirements of section 274(d) and this paragraph.

(5) Loss of records due to circumstances beyond control of the taxpayer. Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer 's control , such as destruction by fire, flood, earthquake, or other casualty, the taxpayer shall have a right to substantiate a deduction by reasonable reconstruction of his expenditures or use.

(6) Special rules —(i) Separate expenditure or use —(A) In general. For the purposes of this section, each separate payment or use by the taxpayer shall ordinarily be considered to constitute a separate expenditure. However, concurrent or repetitious expenses or uses may be substantiated as a single item . To illustrate the above rules, where a taxpayer entertains a business guest at dinner and thereafter at the theater, the payment for dinner shall be considered to constitute one expenditure and the payment for the tickets for the theater shall be considered to constitute a separate expenditure. Similarly, if during a day of business travel a taxpayer makes separate payments for breakfast, lunch, and dinner, he shall be considered to have made three separate expenditures. However, if during entertainment at a cocktail lounge the taxpayer pays separately for each serving of refreshments, the total amount expended for the refreshments will be treated as a single expenditure. A tip may be treated as a separate expenditure.

(B) Aggregation of expenditures. Except as otherwise provided in this section, the account book, diary, log, statement of expense, trip sheet, or similar record required by paragraph (c)(2)(ii) of this section shall be maintained with respect to each separate expenditure and not with respect to aggregate amounts for two or more expenditures. Thus, each expenditure for such items as lodging and air or rail travel shall be recorded as a separate item and not aggregated. However, at the option of the taxpayer , amounts expended for breakfast, lunch, or dinner, may be aggregated. A tip or gratuity which is related to an underlying expense may be aggregated with such expense. In addition, amounts expended in connection with the use of listed property during a taxable year , such as for gasoline or repairs for an automobile, may be aggregated. If these expenses are aggregated, the taxpayer must establish the date and amount , but need not prove the business purpose of each expenditure. Instead, the taxpayer may prorate the expenses based on the total business use of the listed property . For other provisions permitting recording of aggregate amounts in an account book, diary, log, statement of expense, trip sheet, or similar record, see paragraphs (b)(2)(i) and (b)(3) of this section (relating to incidental costs of travel and entertainment).

(C) Aggregation of business use. Uses which may be considered part of a single use, for example , a round trip or uninterrupted business use, may be accounted for by a single record. For example , use of a truck to make deliveries at several different locations which begins and ends at the business premises and which may include a stop at the business premises in between two deliveries may be accounted for by a single record of miles driven. In addition, use of a passenger automobile by a salesman for a business trip away from home over a period of time may be accounted for by a single record of miles traveled. De minimis personal use (such as a stop for lunch on the way between two business stops) is not an interruption of business use.

(ii) Allocation of expenditure. For purposes of this section, if a taxpayer has established the amount of an expenditure, but is unable to establish the portion of such amount which is attributable to each person participating in the event giving rise to the expenditure, such amount shall ordinarily be allocated to each participant on a pro rata basis, if such determination is material. Accordingly, the total number of persons for whom a travel or entertainment expenditure is incurred must be established in order to compute the portion of the expenditure allocable to such person .

(iii) Primary use of a facility. Section 274(a) (1)(B) and (2)(C) deny a deduction for any expenditure paid or incurred before January 1, 1979, with respect to a facility , or paid or incurred before January 1, 1994, with respect to a club, used in connection with an entertainment activity unless the taxpayer establishes that the facility (including a club) was used primarily for the furtherance of the taxpayer 's trade or business . A determination whether a facility before January 1, 1979, or a club before January 1, 1994, was used primarily for the furtherance of the taxpayer 's trade or business will depend upon the facts and circumstances of each case. In order to establish that a facility was used primarily for the furtherance of his trade or business , the taxpayer shall maintain records of the use of the facility , the cost of using the facility , mileage or its equivalent (if appropriate), and such other information as shall tend to establish such primary use. Such records of use shall contain—

(A) For each use of the facility claimed to be in furtherance of the taxpayer 's trade or business , the elements of an expenditure specified in paragraph (b)(3) of this section, and

(B) For each use of the facility not in furtherance of the taxpayer 's trade or business , an appropriate description of such use, including cost , date, number of persons entertained, nature of entertainment and, if applicable, information such as mileage or its equivalent. A notation such as “personal use” or “family use” would, in the case of such use, be sufficient to describe the nature of entertainment.

(iv) Additional information. In a case where it is necessary to obtain additional information, either—

(A) To clarify information contained in records, statements, testimony, or documentary evidence submitted by a taxpayer under the provisions of paragraph (c)(2) or (c)(3) of this section, or

(B) To establish the reliability or accuracy of such records, statements, testimony, or documentary evidence , the district director may, notwithstanding any other provision of this section, obtain such additional information by personal interview or otherwise as he determines necessary to implement properly the provisions of section 274 and the regulations thereunder.

(7) Specific exceptions. Except as otherwise prescribed by the Commissioner, substantiation otherwise required by this paragraph is not required for—

(i) Expenses described in section 274(e)(2) relating to food and beverages for employees , section 274(e)(3) relating to expenses treated as compensation , section 274(e)(8) relating to items available to the public , and section 274(e)(9) relating to entertainment sold to customers, and

(ii) Expenses described in section 274(e)(5) relating to recreational, etc ., expenses for employees , except that a taxpayer shall keep such records or other evidence as shall establish that such expenses were for activities (or facilities used in connection therewith) primarily for the benefit of employees other than employees who are officers, shareholders or other owners (as defined in section 274(e)(5)), or highly compensated employees .

(d) Disclosure on returns —(1) In general. The Commissioner may, in his discretion, prescribe rules under which any taxpayer claiming a deduction or credit for entertainment, gifts, travel, or with respect to listed property , or any other person receiving advances, reimbursements, or allowances for such items, shall make disclosure on his tax return with respect to such items. The provisions of this paragraph shall apply notwithstanding the provisions of paragraph (f) of this section.

(2) Business use of passenger automobiles and other vehicles.

(i) On returns for taxable years beginning after December 31, 1984, taxpayers that claim a deduction or credit with respect to any vehicle are required to answer certain questions providing information about the use of the vehicle. The information required on the tax return relates to mileage (total, business, commuting, and other personal mileage), percentage of business use, date placed in service , use of other vehicles, after-work use, whether the taxpayer has evidence to support the business use claimed on the return, and whether or not the evidence is written.

(ii) Any employer that provides the use of a vehicle to an employee must obtain information from the employee sufficient to complete the employer 's tax return. Any employer that provides more than five vehicles to its employees need not include any information on its return. The employer , instead, must obtain the information from its employees , indicate on its return that it has obtained the information, and retain the information received. Any employer—

(A) That can satisfy the requirements of § 1.274 –6T(a)(2), relating to vehicles not used for personal purposes,

(B) That can satisfy the requirements of § 1.274 –6T(a)(3), relating to vehicles not used for personal purposes other than commuting, or

(C) That treats all use of vehicles by employees as personal use need not obtain information with respect to those vechicles, but instead must indicate on its return that it has vehicles exempt from the requirements of this paragraph (d)(2).

(3) Business use of other listed property. On returns for taxable years beginning after December 31, 1984, taxpayers that claim a deduction or credit with respect to any listed property other than a vehicle (for example , a yacht, airplane, or certain computers) are required to provide the following information:

(i) The date that the property was placed in service ,

(ii) The percentage of business use,

(iii) Whether evidence is available to support the percentage of business use claimed on the return, and

(iv) Whether the evidence is written.

(e) Substantiation of the business use of listed property made available by an employer for use by an employee —(1) Employee —(i) In general. An employee may not exclude from gross income as a working condition fringe any amount of the value of the availability of listed property provided by an employer to the employee , unless the employee substantiates for the period of availability the amount of the exclusion in accordance with the requirements of section 274(d) and either this section or § 1.274 –6T.

(ii) Vehicles treated as used entirely for personal purposes. If an employer includes the value of the availability of a vehicle (as defined in § 1.61 –21(e)(2)) in an employee 's gross income without taking into account any exclusion for a working condition fringe allowable under section 132 and the regulations thereunder with respect to the vehicle, the employee must substantiate any deduction claimed under §§ 1.162 –25 and 1.162–25T for the business/investment use of the vehicle in accordance with the requirements of section 274(d) and either this section or § 1.274 –6T.

(2) Employer —(i) In general. An employer substantiates its business/investment use of listed property by showing either—

(A) That, based on evidence that satisfies the requirements of section 274(d) or statements submitted by employees that summarize such evidence, all or a portion of the use of the listed property is by employees in the employer 's trade or business and, if any employee used the property for personal purposes, the employer included an appropriate amount in the employee 's income , or

(B) In the case of a vehicle, the employer treats all use by employees as personal use and includes an appropriate amount in the employees ' income .

(ii) Reliance on employee records. For purposes of substantiating the business/investment use of listed property that an employer provides to an employee and for purposes of the information required by paragraph (d)(2) and (3) of this section, the employer may rely on adequate records maintained by the employee or on the employee 's own statement if corroborated by other sufficient evidence unless the employer knows or has reason to know that the statement , records, or other evidence are not accurate. The employer must retain a copy of the adequate records maintained by the employee or the other sufficient evidence, if available. Alternatively, the employer may rely on a statement submitted by the employee that provides sufficient information to allow the employer to determine the business/investment use of the property unless the employer knows or has reason to know that the statement is not based on adequate records or on the employee 's own statement corroborated by other sufficient evidence. If the employer relies on the employee 's statement , the employer must retain only a copy of the statement . The employee must retain a copy of the adequate records or other evidence.

(f) Reporting and substantiation of expenses of certain employees for travel, entertainment, gifts, and with respect to listed property —(1) In general. The purpose of this paragraph is to provide rules for reporting and substantiation of certain expenses paid or incurred by employees in connection with the performance of services as employees . For purposes of this paragraph, the term business expenses means ordinary and necessary expenses for travel, entertainment, gifts, or with respect to listed property which are deductible under section 162, and the regulations thereunder, to the extent not disallowed by section 262, 274(c), and 280F. Thus, the term business expenses does not include personal, living, or family expenses disallowed by section 262, travel expenses disallowed by section 274(c), or cost recovery deductions and credits with respect to listed property disallowed by section 280F(d)(3) because the use of such property is not for the convenience of the employer and required as a condition of employment . Except as provided in paragraph (f)(2), advances, reimbursements, or allowances for such expenditures must be reported as income by the employee .

(2) Reporting of expenses for which the employee is required to make an adequate accounting to his employer —(i) Reimbursements equal to expenses. For purposes of computing tax liability , an employee need not report on his tax return business expenses for travel, transportation , entertainment, gifts, or with respect to listed property , paid or incurred by him solely for the benefit of his employer for which he is required to, and does, make an adequate accounting to his employer (as defined in paragraph (f)(4) of this section) and which are charged directly or indirectly to the employer (for example , through credit cards) or for which the employee is paid through advances, reimbursements, or otherwise, provided that the total amount of such advances, reimbursements, and charges is equal to such expenses.

(ii) Reimbursements in excess of expenses. In case the total of the amounts charged directly or indirectly to the employer or received from the employer as advances, reimbursements, or otherwise, exceeds the business expenses paid or incurred by the employee and the employee is required to, and does, make an adequate accounting to his employer for such expenses, the employee must include such excess (including amounts received for expenditures not deductible by him) in income .

(iii) Expenses in excess of reimbursements. If an employee incurs deductible business expenses on behalf of his employer which exceed the total of the amounts charged directly or indirectly to the employer and received from the employer as advances, reimbursements, or otherwise, and the employee makes an adequate accounting to his employer , the employee must be able to substantiate any deduction for such excess with such records and supporting evidence as will substantiate each element of an expenditure (described in paragraph (b) of this section) in accordance with paragraph (c) of this section.

(3) Reporting of expenses for which the employee is not required to make an adequate accounting to his employer. If the employee is not required to make an adequate accounting to his employer for his business expenses or, though required, fails to make an adequate accounting for such expenses, he must submit, as a part of his tax return, the appropriate form issued by the Internal Revenue Service for claiming deductions for employee business expenses (e.g., Form 2106, Employee Business Expenses, for 1985) and provide the information requested on that form, including the information required by paragraph (d)(2) and (3) of this section if the employee 's business expenses are with respect to the use of listed property . In addition, the employee must maintain such records and supporting evidence as will substantiate each element of an expenditure or use (described in paragraph (b) of this section) in accordance with paragraph (c) of this section.

(4) [Reserved]. For further guidance, see § 1.274 –5(f)(4).

(5) Substantiation of expenditures by certain employees. An employee who makes an adequate accounting to his employer within the meaning of this paragraph will not again be required to substantiate such expense account information except in the following cases:

(i) An employee whose business expenses exceed the total of amounts charged to his employer and amounts received through advances, reimbursements or otherwise and who claims a deduction on his return for such excess,

(ii) An employee who is related to his employer within the meaning of section 267(b), but for this purpose the percentage referred to in section 267(b)(2) shall be 10 percent, and

(iii) Employees in cases where it is determined that the accounting procedures used by the employer for the reporting and substantiation of expenses by such employees are not adequate, or where it cannot be determined that such procedures are adequate. The district director will determine whether the employer 's accounting procedures are adequate by considering the facts and circumstances of each case, including the use of proper internal controls . For example , an employer should require that an expense account be verified and approved by a reasonable person other than the person incurring such expenses. Accounting procedures will be considered inadequate to the extent that the employer does not require an adequate accounting from his employees as defined in paragraph (f)(4) of this section, or does not maintain such substantiation. To the extent an employer fails to maintain adequate accounting procedures he will thereby obligate his employees to substantiate separately their expense account information.

(g) [Reserved]. For further guidance, see § 1.274 –5(g).

(h) Reporting and substantiation of certain reimbursements of persons other than employees —(1) In general. The purpose of this paragraph is to provide rules for the reporting and substantiation of certain expenses for travel, entertainment, gifts, or with respect to listed property paid or incurred by one person (hereinafter termed “independent contractor”) in connection with services performed for another person other than an employer (hereinafter termed “client or customer”) under a reimbursement or other expense allowance arrangement with such client or customer. For purposes of this paragraph, the term business expenses means ordinary and necessary expenses for travel, entertainment, gifts, or with respect to listed property which are deductible under section 162, and the regulations thereunder, to the extent not disallowed by sections 262 and 274(c). Thus, the term business expenses does not include personal, living, or family expenses disallowed by section 262 or travel expenses disallowed by section 274(c), and reimbursements for such expenditures must be reported as income by the independent contractor. For purposes of this paragraph, the term reimbursements means advances, allowances, or reimbursements received by an independent contractor for travel, entertainment, gifts, or with respect to listed property in connection with the performance by him of services for his client or customer, under a reimbursement or other expense allowance arrangement with his client or customer, and includes amounts charged directly or indirectly to the client or customer through credit card systems or otherwise. See paragraph (j) of this section relating to the substantiation of meal expenses while traveling away from home.

(2) Substantiation by independent contractors. An independent contractor shall substantiate, with respect to his reimbursements, each element of an expenditure (described in paragraph (b) of this section) in accordance with the requirements of paragraph (c) of this section; and, to the extent he does not so substantiate, he shall include such reimbursements in income . An independent contractor shall so substantiate a reimbursement for entertainment regardless of whether he accounts (within the meaning of paragraph (h)(3) of this section) for such entertainment.

(3) Accounting to a client or customer under section 274(e)(4)(B). Section 274(e)(4)(B) provides that section 274(a) (relating to disallowance of expenses for entertainment) shall not apply to expenditures for entertainment for which an independent contractor has been reimbursed if the independent contractor accounts to his client or customer, to the extent provided by section 274(d). For purposes of section 274(e)(4)(B), an independent contractor shall be considered to account to his client or customer for an expense paid or incurred under a reimbursement or other expense allowance arrangement with his client or customer if, with respect to such expense for entertainment, he submits to his client or customer adequate records or other sufficient evidence conforming to the requirements of paragraph (c) of this section.

(4) Substantiation by client or customer. A client or customer shall not be required to substantiate, in accordance with the requirements of paragraph (c) of this section, reimbursements to an independent contractor for travel and gifts, or for entertainment unless the independent contractor has accounted to him (within the meaning of section 274(e)(4)(B) and paragraph (h)(3) of this section) for such entertainment. If an independent contractor has so accounted to a client or customer for entertainment, the client or customer shall substantiate each element of the expenditure (as described in paragraph (b) of this section) in accordance with the requirements of paragraph (c) of this section.

(i) [Reserved]

(j) [Reserved]. For further guidance, see § 1.274 –5(j).

(k) and (l) [Reserved] For further guidance, see § 1.274 –5(k) and (l) .

(m) Effective date. Section 274(d), as amended by the Tax Reform Act of 1984 and Public Law 99–44 , and this section (except as provided in paragraph (d)(2) and (3) of this section) apply with respect to taxable years beginning after December 31, 1985. Section 274(d) and this section apply to any deduction or credit claimed in a taxable year beginning after December 31, 1985, with respect to any listed property , regardless of the taxable year in which the property was placed in service . However, except as provided in § 1.132–5(h) with respect to qualified nonpersonal use vehicles, the substantiation requirements of section 274(d) and this section do not apply to the determination of an employee 's working condition fringe exclusion or to the determination under § 1.162–25(b) of an employee 's deduction before the date that those requirements apply, under this paragraph (m) , to the employer , if the employer is taxable. Paragraph (j)(3) of this section applies to expenses paid or incurred after September 30, 2002.

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Substantiation Requirement for Certain Business Expenses

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  Substantiation Requirement for Certain Business Expenses

Imagine that you travel to a neighboring state and look at some construction equipment you’re considering buying for three days. Within the next month, you will attend several daily workshops covering industry best practices at a construction industry convention. All the expenses you incurred on both trips can be deducted as business expenses at tax time. Is this correct?

If your deductions are substantiated with receipts, yes. In the absence of receipts, your deductions may be rejected by the IRS . The unwary can easily get into trouble if they fail to document business-related expenses properly. Suppose the IRS rejects one of your business expense deductions. In that case, you will not only be liable for taxes on income resulting from the disallowed expense, but you may also have to pay penalties and interest.

Tax law requires taxpayers to be able to provide proper records or sufficient evidence to prove certain business expenses . Otherwise, they cannot be taken as deductions.

Substantiation: What Is It?

• What Is “a Reasonable Period of Time”?

What Are the Kinds of Business Expenses Covered by the Substantiation Rule?

What do i need to substantiate, is there any evidence i need to keep, what are per diem rates, is there an exception to the substantiation rule, do all of my expenses have to be business expenses, the importance of business expense substantiation, can an attorney help me with my tax problems.

The federal tax law requires that a trade or business expense be substantiated before it can be deducted. To substantiate a business deduction, you must be able to demonstrate the nature of the expense and prove the amount paid.

Within a reasonable period of time after the expense has been paid or incurred, employees must provide evidence of the expense’s amount, time, place, and business purpose.

What Is “a Reasonable Period of Time”?

Two methods are available to determine if substantiation and excess amounts have been returned within a reasonable period of time:

• Fixed-date method: The employee must substantiate the expense within 60 days from the date it was paid or incurred, and the employer must be reimbursed for any excess advance within 120 days after the expense was incurred or paid.
• Periodic statement method: An employer can send the employee a periodic statement listing amounts paid that have not been substantiated, requiring the employee to either substantiate or return the excess amount within 120 days of receiving the statement. Statements must be sent no less than once a quarter.

Employers may offer hybrid plans that combine both methods. The fixed-date method may require substantiation of out-of-pocket expenses and mileage reimbursements. The employer may use the periodic statement method to substantiate company credit card charges.

Employers may also provide an employee with a statement for business expenses that have been submitted for reimbursement, but the employee will not be reimbursed unless proper substantiation is provided.

The substantiation rule covers the following types of expenses:

• Expenses associated with travel and lodging;
• The cost of entertainment;
• Gifts to business associates; and
• Automobile, computer, and cell phone expenses.

Since these types of expenses are susceptible to abuse, they are required to be substantiated.

Taxpayers must provide evidence of four things:

• How much the expense was;
• When and where the expense occurred;
• What the expense is for; and
• You and the person who received your gift have a business relationship.

An employee should keep a written expense record before submitting it for reimbursement. Records of expenses don’t need to be in a particular format, but they should be kept in a way that allows the employee to keep a detailed record of the amount, date, place, and purpose of the expense. Employees must also be able to document business meals taken at their tax home and meals provided for others when they are away from their tax home via the format used.

Employees must record the following information in their records to substantiate these expenses:

• Attendees’ names
• The meeting’s business purpose
• Date and location of the business meeting

Documentary evidence is the best acceptable evidence of an employee’s expenses. Examples include receipts, canceled checks, and bills. The document must, however, provide the amount, date, place, and essential character of the expense to be deemed acceptable.

The IRS typically requires documentary evidence for travel expenses only if the expense exceeds $75. Lodging expenses, however, are an exception. Because lodging bills may include other fees in addition to room charges (such as meals, telephone calls, laundry, Internet access, and video rentals), the hotel or motel must provide an itemized bill. Rentals of videotapes or other personal expenses should not be reimbursed.

An employee should keep a written record of all expenses before submitting them for reimbursement. Expense records provide detailed proof of an employee’s expenses.

Account books and expense diaries are generally acceptable types of records. For expenses over $75, receipts and paid bills are usually required as proof.

A written document is preferable to an oral confirmation, and contemporaneous records are better than those not prepared at or near the time of the expense.

If you use per diem rates to determine reimbursement amounts, you can simplify your bookkeeping and have more control over expenses. Travel expenses include lodging, meals, and incidentals. Travel expenses are paid to employees as per diem. Instead of paying their actual travel expenses, they receive this allowance.

The federal per diem rate covers the cost of lodging and meals together, as well as the cost of meals alone. The per diem rates also differ for different parts of the country due to the varying cost of living between states and cities. When your business uses per diem rates that are less than or equal to the federal rates, the IRS won’t require you to substantiate your expenses. The time, location, and business purpose of employees’ trips will still need to be substantiated.

Imagine you travel to a neighboring state and look at some office equipment you’re considering buying. The following month, you attend an industry convention where you attend daily workshops on industry best practices.

Both trips can be deducted as business expenses at tax-time if you have receipts that substantiate your deductions. If not, the IRS may reject your deductions.

Yes. A taxpayer may use other reasonable means to substantiate expenses if they can show they were lost due to circumstances beyond their control (e.g., fire, earthquake, or flood). Otherwise, the substantiation rule is usually strictly applied.

The taxpayer must make a reasonable allocation only to deduct the expenses related to business and not to personal purposes when expenses (e.g., entertainment expenses) are incurred for both business and personal purposes at the same time.

Employees are often required to incur expenses that their employers will later reimburse. Without proper substantiation, expense reimbursements may be treated as taxable income, resulting in the employee paying taxes on the income.

Tax laws are complex and constantly changing. The various tax preparation software available on the market can help you prepare your tax returns. Still, they cannot provide the same level of service as an experienced and knowledgeable tax attorney.

If you are unsure about the characterization of your expenses or need someone to represent you before the IRS, a tax attorney can help.

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Substantiating Business Expenses: A Primer

Businesses can generally deduct their “ordinary and necessary” business expenses. But even if an expense is legitimate, it’s not deductible unless it’s adequately substantiated. Typically, substantiation requires proof of payment and evidence showing the character and deductibility of the expenditure. Proof of payment may include canceled checks, bank statements, credit card statements or invoices marked “paid.” You can establish the character and deductibility of an expense with items such as sales slips, invoices, receipts, payment acknowledgements and check registers. A canceled check may also suffice if it indicates the nature of the expense.

 If a business is unable to fully substantiate an expense, the courts have some leeway to approximate deduction amounts, provided the business presents sufficient evidence to support an estimate. This approach isn’t available, however, for expenses that are subject to heightened substantiation requirements.

Strict requirements

The tax code imposes stricter substantiation requirements for some expenses, including business travel, business meals, business gifts and expenses related to “listed property,” such as passenger automobiles. To substantiate these expenses, a business must keep “adequate records” — or “sufficient evidence corroborating the taxpayer’s own statement” — establishing:

• The amount of the expense,
• The time and place the expense was incurred,
• The business purpose of the expense, and
• If applicable, the business relationship with the person or persons receiving the benefit (e.g., a meal or a gift).

Examples of adequate records include contemporaneous logs, diaries, account books, trip sheets and expense statements.

Case in point

A recent U.S. Tax Court case — Wolpert v. Commissioner — illustrates the dangers of failing to substantiate business expenses. In that case, the court disallowed a consultant’s vehicle and travel expenses because he failed to adequately substantiate those expenses with contemporaneous records or other corroborative evidence. The court noted that to deduct vehicle expenses, a taxpayer must substantiate the amount of the expense (or, alternatively, use the standard mileage rate), the business and total mileage, and the date and purpose of each business use. Although the taxpayer provided mileage logs and calendars documenting some of this information, it was unclear whether these records were maintained contemporaneously or prepared after the fact. Moreover, even assuming they were contemporaneous, they failed to state the business purpose of each trip or the vehicle’s total mileage.

 With regard to travel expenses, the taxpayer failed to provide adequate records or sufficient corroborative evidence establishing travel dates, destinations, business purpose or the number of days spent on business.

Don’t lose your deductions

To avoid disallowance of your legitimate costs of doing business, be sure your business has processes in place to substantiate those expenses. Keeping contemporaneous records can be challenging, but technology can help. There are a variety of smartphone applications and other programs that will track and categorize expenses or mileage, store digital receipts, and synchronize expenses with your accounting system.

This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.

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• Tax Matters

Deemed Substantiation of Business Travel Expenses

IRC section 162(a)(2) permits taxpayers a deduction for business travel expenses such as lodging, meals and other incidental costs while away from home. IRC section 274(n) limits the deduction for meal and beverage expenses to 50% of the amount incurred. And section 274(d) requires strict substantiation of all travel expenses. In lieu of substantiating actual expenses, however, in certain circumstances taxpayers may determine the deductible amount by electing to use the “deemed-substantiation” methods in revenue procedure 96-64.

Continental Express Inc., a long-haul trucking company, reimbursed its drivers 9 cents a mile to cover expenses such as parking, lodging, showers, laundry, linens and Federal Express charges. The drivers could spend the per diem amount at their own discretion. The average amount the company paid to the drivers under the per diem plan for the years in question was less than the federal meals and incidental expense (M&IE) rate.

Revenue procedure 96-64 says 40% of a per diem paid for lodging, meals and incidental expenses is treated as having been paid for food and beverages when the amount is less than the federal rate. Since the drivers sometimes used part of the per diem for lodging, Continental treated 40% of the 9 cents a mile (3.6 cents) as paid for meals and beverages and 60% (5.4 cents) as paid for other items. This resulted in a deduction for the company of 7.2 cents a mile (50% of 3.6 cents, plus 5.4 cents).

Of this amount the IRS disallowed 2.7 cents a mile based on another sentence in the revenue procedure: It says when a per diem is paid only for meals and incidental expenses, the amount treated as paid for food and beverages is the lesser of the actual per diem or the federal M&IE rate. The IRS, therefore, applied the 50% limitation to the entire 9 cents a mile per diem, allowing a deduction of only 4.5 cents a mile. Over the three-year period in question, the disallowed deductions amounted to approximately $2,800,000. The taxpayer petitioned the Tax Court for relief.

Result. For the IRS. It argued that revenue procedure 96-64 clearly says a taxpayer’s per diem allowance is considered paid only for M&IE when calculated in the same manner as the drivers’ compensation. In this case Continental also paid its drivers on a per mile basis. Since the company’s per diem was treated as being paid only for M&IE, the revenue procedure required the smaller of the per diem paid or the federal M&IE rate be treated as paid for food and beverages. Also, since the average amount Continental paid per day was less than the federal per diem rate, the entire amount should have been considered paid for food and beverages subject to the 50% limitation. The Tax Court agreed.

Continental argued revenue procedure 96-64 was invalid because the tax treatment of the expenses had been computed without regard to their actual nature. The Tax Court agreed with Continental that the deduction under revenue procedure 96-64 did not necessarily match the actual expenses. The court held that the taxpayer had two options: It could have substantiated the actual expenses following the requirements of revenue procedure 96-64 or it could have followed the revenue procedure’s deemed-substantiation rules. Since those rules are elective and the taxpayer avoids having to substantiate actual expenses, Continental must take the bad with the good—the permitted deduction does not necessarily represent the actual expense.

The company also attempted to persuade the court it should be allowed additional deductions: Continental provided testimony at the trial estimating its drivers’ nonmeal travel expenses in an attempt to deduct them under the Cohan rule. The court found the company had provided reasonable estimates of the actual expenses but rejected this attempt as well. Since Continental did not follow the substantiation requirements of the regulations under section 274(d), it was not entitled to any deductions related to those expenses.

Certain deductions have strict substantiation rules. This case illustrates for CPAs the importance of following such rules. It also points out that when deemed-substantiation rules are provided the IRS and the courts will interpret them strictly.

Prepared by Charles J. Reichert, CPA, CIA, professor of accounting at the University of Wisconsin, Superior.

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What Are Travel Expenses?

Understanding travel expenses, the bottom line.

• Deductions & Credits
• Tax Deductions

Travel Expenses Definition and Tax Deductible Categories

Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.

For tax purposes, travel expenses are costs associated with traveling to conduct business-related activities. Reasonable travel expenses can generally be deducted from taxable income by a company when its employees incur costs while traveling away from home specifically for business. That business can include conferences or meetings.

Key Takeaways

• Travel expenses are tax-deductible only if they were incurred to conduct business-related activities.
• Only ordinary and necessary travel expenses are deductible; expenses that are deemed unreasonable, lavish, or extravagant are not deductible.
• The IRS considers employees to be traveling if their business obligations require them to be away from their "tax home” substantially longer than an ordinary day's work.
• Examples of deductible travel expenses include airfare, lodging, transportation services, meals and tips, and the use of communications devices.

Travel expenses incurred while on an indefinite work assignment that lasts more than one year are not deductible for tax purposes.

The Internal Revenue Service (IRS) considers employees to be traveling if their business obligations require them to be away from their "tax home" (the area where their main place of business is located) for substantially longer than an ordinary workday, and they need to get sleep or rest to meet the demands of their work while away.

Well-organized records—such as receipts, canceled checks, and other documents that support a deduction—can help you get reimbursed by your employer and can help your employer prepare tax returns. Examples of travel expenses can include:

• Airfare and lodging for the express purpose of conducting business away from home
• Transportation services such as taxis, buses, or trains to the airport or to and around the travel destination
• The cost of meals and tips, dry cleaning service for clothes, and the cost of business calls during business travel
• The cost of computer rental and other communications devices while on the business trip

Travel expenses do not include regular commuting costs.

Individual wage earners can no longer deduct unreimbursed business expenses. That deduction was one of many eliminated by the Tax Cuts and Jobs Act of 2017.

While many travel expenses can be deducted by businesses, those that are deemed unreasonable, lavish, or extravagant, or expenditures for personal purposes, may be excluded.

Types of Travel Expenses

Types of travel expenses can include:

• Personal vehicle expenses
• Taxi or rideshare expenses
• Airfare, train fare, or ferry fees
• Laundry and dry cleaning
• Business meals
• Business calls
• Shipment costs for work-related materials
• Some equipment rentals, such as computers or trailers

The use of a personal vehicle in conjunction with a business trip, including actual mileage, tolls, and parking fees, can be included as a travel expense. The cost of using rental vehicles can also be counted as a travel expense, though only for the business-use portion of the trip. For instance, if in the course of a business trip, you visited a family member or acquaintance, the cost of driving from the hotel to visit them would not qualify for travel expense deductions .

The IRS allows other types of ordinary and necessary expenses to be treated as related to business travel for deduction purposes. Such expenses can include transport to and from a business meal, the hiring of a public stenographer, payment for computer rental fees related to the trip, and the shipment of luggage and display materials used for business presentations.

Travel expenses can also include operating and maintaining a house trailer as part of the business trip.

Can I Deduct My Business Travel Expenses?

Business travel expenses can no longer be deducted by individuals.

If you are self-employed or operate your own business, you can deduct those "ordinary and necessary" business expenses from your return.

If you work for a company and are reimbursed for the costs of your business travel , your employer will deduct those costs at tax time.

Do I Need Receipts for Travel Expenses?

Yes. Whether you're an employee claiming reimbursement from an employer or a business owner claiming a tax deduction, you need to prepare to prove your expenditures. Keep a running log of your expenses and file away the receipts as backup.

What Are Reasonable Travel Expenses?

Reasonable travel expenses, from the viewpoint of an employer or the IRS, would include transportation to and from the business destination, accommodation costs, and meal costs. Certainly, business supplies and equipment necessary to do the job away from home are reasonable. Taxis or Ubers taken during the business trip are reasonable.

Unreasonable is a judgment call. The boss or the IRS might well frown upon a bill for a hotel suite instead of a room, or a sports car rental instead of a sedan.

Individual taxpayers need no longer fret over recordkeeping for unreimbursed travel expenses. They're no longer tax deductible by individuals, at least until 2025 when the provisions in the latest tax reform package are due to expire or be extended.

If you are self-employed or own your own business, you should keep records of your business travel expenses so that you can deduct them properly.

Internal Revenue Service. " Topic No. 511, Business Travel Expenses ."

Internal Revenue Service. " Publication 463, Travel, Gift, and Car Expenses ," Page 13.

Internal Revenue Service. " Publication 5307, Tax Reform Basics for Individuals and Families ," Page 7.

Internal Revenue Service. " Publication 463, Travel, Gift, and Car Expenses ," Pages 6-7, 13-14.

Internal Revenue Service. " Publication 463, Travel, Gift, and Car Expenses ," Page 4.

Internal Revenue Service. " Publication 5307, Tax Reform Basics for Individuals and Families ," Pages 5, 7.

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IRS Amends Temporary, Final Regs on Substantiation of Travel Expenses Away From Home

T.d. 9020; 67 f.r. 68512-68513.

• Code Sections Section 274
• Jurisdictions United States
• Language English
• Tax Analysts Electronic Citation TD 9020

 DEPARTMENT OF THE TREASURY

[2] ACTION: Final and temporary regulations.

[3] SUMMARY: This document contains amendments to regulations relating to the requirement to substantiate business expenses for traveling expenses while away from home. The regulations affect taxpayers who deduct expenses for incidental expenses while traveling away from home. The text of the temporary regulations also serves as text for the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register.

[4] DATES: Effective Date : These regulations are effective November 12, 2002.

[5] Applicability Date : For dates of applicability, see §1.274-5T(m).

[6] FOR FURTHER INFORMATION CONTACT: John Moriarty (202) 622-4930 (not a toll free call).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

[7] Section 274(d) provides that a taxpayer is not allowed a deduction or credit for certain expenses unless the expense is substantiated. These substantiation requirements apply to deductions under section 162 or 212 for any traveling expense (including meals and lodging) while away from home. Under section 274(d), the Secretary may issue regulations that provide that some or all of the substantiation requirements will not apply to expenses that do not exceed a prescribed amount. Section 1.274-5(j)(1) of the regulations permits the Commissioner to establish a method under which a taxpayer may substantiate the amount of meal expenses paid or incurred while traveling away from home by means of an allowance in lieu of substantiating the actual cost of meals.

[8] Under this authority, the Commissioner has provided a method for taxpayers to substantiate deductible costs of business meal and incidental expenses while away from home by means of an allowance. See Rev. Proc. 2001-47 (2001-42 I.R.B. 332). These temporary regulations amend §1.274-5T to authorize the Commissioner to establish a method under which a taxpayer may substantiate the amount of incidental expenses paid or incurred while traveling away from home by means of an allowance in lieu of substantiating the actual cost. The taxpayer will not be relieved of the requirement to substantiate the actual cost of other travel expenses as well as the time, place and business purpose of the travel.

Special Analyses

[9] It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations do not require a collection of information and do not impose any new or different requirements on small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact.

Drafting Information

[10] The principal author of these regulations is John Moriarty, Office of Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

[11] Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

[12] Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.274-5 also issued under 26 U.S.C. 274(d). * * *

Par. 2. Section 1.274-5 is amended by adding paragraph (j)(3) to read as follows:

§1.274-5 Substantiation requirements.

(3) [Reserved]. For further guidance, see §1.274-5T(j)(3).

Par. 3. Section 1.274-5T is amended by revising paragraph (j) and the last sentence of paragraph (m) to read as follows:

§1.274-5T Substantiation requirements (temporary).

(j)(1) and (2) [Reserved]. For further guidance, see §1.274-5(j)(1) and (2).

(3) Incidental expenses while traveling away from home. The Commissioner may establish a method under which a taxpayer may use a specified amount or amounts for incidental expenses paid or incurred while traveling away from home in lieu of substantiating the actual cost of incidental expenses. The taxpayer will not be relieved of the requirement to substantiate the actual cost of other travel expenses as well as the time, place, and business purpose of the travel.

(m) * * * Paragraph (j)(3) of this section applies to expenses paid or incurred after September 30, 2002.

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Claiming a tax deduction for business travel expenses

You can claim a tax deduction for expenses you incur travelling for your business.

Last updated 18 August 2019

As a business owner, the general rule is that you can claim deductions for expenses if you or your employee are travelling for business purposes. A travel diary is:

• compulsory for sole traders and partners in a partnership to record overnight business travel expenses
• highly recommended for everyone else.

For a summary of this content in poster format, see Travel expenses (PDF 526KB) This link will download a file .

Expenses you can claim

Your business can claim a deduction for travel expenses related to your business, whether the travel is taken within a day, overnight, or for many nights.

Expenses you can claim include:

• train, tram, bus, taxi, or ride-sourcing fares
• car hire fees and the costs you incur (such as fuel, tolls and car parking) when using a hire car for business purposes
• accommodation
• meals, if you are away overnight.

To claim expenses for overnight travel, you must have a permanent home elsewhere and your business must require you to stay away from home overnight.

If you are entitled to goods and services tax (GST) input tax credits, you must claim your deduction in your income tax return at the GST exclusive amount.

Expenses you can't claim

You can only claim the business portion of business travel expenses. You must exclude any private expenses, such as:

• a holiday or visit to family or friends that is combined with the business travel
• the expenses associated with you or your employee taking a family member on the trip
• souvenirs and gifts
• sightseeing and entertainment
• visas, passports or travel insurance
• travel expenses that arise because you are relocating or living away from home
• travel undertaken before you started running your business.
• Claiming a tax deduction for motor vehicle expenses – information about business motor vehicle expenses and travelling to and from your places of business.

Media: Business deductions - Travel expenses: Tax basics for small business https://tv.ato.gov.au/ato-tv/media?v=bd1bdiubfw7bqp External Link ( Duration: 01:23)

How to claim employee travel expenses

If your employees travel for your business, the business must actually pay for the travel expense to be able to claim it as a deduction. The business can pay for the expense by:

• paying directly for the expense from the business account
• paying a travel allowance to the employee
• reimbursing the employee for their expenses.

Fringe benefits tax (FBT) may apply if your business pays for or reimburses your employees for their travel expenses. Certain exemptions and concessions may apply to reduce your FBT liability. For example, your business may not have an FBT liability if it reimburses an employee for their travel expenses to attend a work conference, which the employee would have been able to claim as an income tax deduction if you hadn't reimbursed them.

You will be liable for FBT if your employee extended their travel for private purposes and you reimburse the employee for these private costs. If your business provides benefits to your employees, you may need to obtain some records from the employee.

If you are the director of a company and the business pays for private portions of your travel expenses, there may also be Division 7A implications.

If you pay your employees a travel allowance or a living-away-from-home allowance, there are different considerations.

• Fringe benefits tax
• Private company benefits – Division 7A dividends
• Travel allowances

Travel diaries

Sole traders and partners in a partnership.

If you are a sole trader or a partner in a partnership and you travel for six or more consecutive nights, you must keep a travel diary or similar document before your travel ends, or as soon as possible afterwards. In your travel diary, record the detail of each business activity including:

• what the activity was
• the date and approximate time the business activity began
• how long the business activity lasted
• the name of the place where the business activity occurred.

Your travel diary can be in any format as long as it contains sufficient detail to justify what you are claiming.

Example 1: Rebecca

Rebecca owns a business as a sole trader landscape gardener. She is invited to exhibit at the Chelsea flower show in England. This involves six days of work representing her business at the show. After the show is finished, Rebecca spends some time sightseeing.

Rebecca’s son James joins her on her trip. James is not involved in the business and spends the days exploring London while Rebecca is at the Chelsea flower show.

As Rebecca is travelling for more than six nights, she keeps the below travel diary.

Travel diary for May:

• Saturday 9 May – 10.00am flight Q13 to London (via Dubai)
• Sunday 10 May – Arrive London 1.00pm local time. Bus to hotel in Chelsea 3.00pm
• Monday 11 May – Rest day
• Tuesday 12 May – Chelsea flower show set-up day from 9.00am
• Wednesday 13 May – Chelsea flower show day 1
• Thursday 14 May – Chelsea flower show day 2
• Friday 15 May – Chelsea flower show day 3
• Saturday 16 May – Chelsea flower show day 4
• Sunday 17 May – Chelsea flower show day 5, ends 5.00pm
• Monday 18 May – Sightseeing in London
• Tuesday 19 May – Sightseeing day trip to Oxford
• Wednesday 20 May – Bus to airport. Flight home Q23 6.00pm from London, arrive 10.00pm local time.

This shows that Rebecca travelled for 12 days. She spent the majority of the time on business related activities and took the opportunity to do some sightseeing while in London for two extra days. Rebecca can only claim deductions for the business-related portion of her travel.

Rebecca can claim:

• the return airfare to London (which does not have to be separated out as the primary purpose of her travel is for business, the sightseeing was incidental)
• her bus fares to and from the airport
• the costs associated with working at the Chelsea flower show including the exhibitors fee and transport to and from the location from her hotel
• Rebecca’s accommodation in Chelsea up to and including 17 May
• meals and incidental costs on the days she attended the Chelsea flower show.

Rebecca cannot claim:

• accommodation, meals or transport expenses on the days noted for sightseeing
• additional private costs from the whole of her time away (such as souvenirs)
• costs of visas, passports or travel insurance
• any of James’ expenses (such as his airfares, the cost of his meals or the cost of an extra hotel room for James).

Example 2: Noah

Noah owns a business as a sole trader interior designer and decorator. He lives and works in Perth. A new customer has asked him to design and decorate her home in Broome. This will take two weeks to complete.

Noah flies to Broome on Sunday evening and returns to Perth two weeks later. On the weekend he does some sightseeing and catches up with friends. He keeps the following diary:

• Sunday: Fly to Broome (depart 4.00pm, arrive 6.30pm)
• Monday 2 September: Purchase decorating supplies 9.00am–10.30am. Working at client’s house 10.45am – 4.00pm
• Tuesday 3 – Friday 6 September: Working at client’s house 7.30am to 4.00pm
• Saturday: Day trip to Horizontal Falls. Dinner with Pam and Geoff
• Sunday: Sightseeing around Broome
• Monday 9 – Friday 13 September: Working 7.30am to 4.00pm at client’s house
• Saturday: return flight to Perth (depart 10.00am, arrive 12.30pm).

Noah can claim:

• his return airfare to Broome and taxi to his hotel and from hotel to airport
• accommodation in Broome for all nights (as the weekend in between was incidental and the primary purpose of travel was for business)
• costs of undertaking his work in Broome (such as hire of tools)
• meals and incidental costs of his work.

Noah cannot claim his private expenses, including:

• the cost of the sightseeing he does on the weekend
• the dinner he has with friends.

Companies and trusts

If your business is a company or a trust, we highly recommend you use a travel diary as it will help you work out the proportion of the travel that was for private purposes.

• PAYG withholding implications of Travel allowances
• Fringe benefits tax (FBT)

Records for business travel expenses

Keep records for five years to substantiate your business travel expenses, including:

• tax invoices
• boarding passes
• travel diaries
• details of how you worked out the private portion of expenses.

If you’re a sole trader with simple tax affairs, you can use the myDeductions tool in the ATO app to record your business-related expenses.

• Record keeping for business
• myDeductions

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ADMINISTRATIVE

Employee plans, exempt organizations, the irs mission, introduction, notice 2021-52, rev. proc. 2021-37, rev. proc. 2021-38, rev. proc. 2021-39, rev. proc. 2021-40, abbreviations, numerical finding list, internal revenue bulletin, we welcome comments about the internal revenue bulletin, internal revenue bulletin: 2021-38.

September 20, 2021

HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

Notice 2021-52, page 381.

Optional special per diem rates. This notice provides the 2021-2022 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. The notice includes (1) the special transportation industry meal and incidental expenses rates, (2) the rate for the incidental expenses only deduction, and (3) the rates and list of high-cost localities for the high-low substantiation method. This notice also modifies Notice 2020-71, 2020-40 I.R.B. 786, to correct the portion of the year Sedona, Arizona is a high-cost locality under section 5 of Notice 2020-71.

Rev. Proc. 2021-39, page 426.

This revenue procedure provides temporary guidance regarding the public approval requirement under § 147(f) of the Internal Revenue Code for tax-exempt qualified private activity bonds. Specifically, in light of the continuing Coronavirus Disease 2019 (COVID-19) pandemic, this revenue procedure extends until March 31, 2022, the time period described in section 4.02 of Rev. Proc. 2020-21, 2020-22 I.R.B. 872, as modified by Rev. Proc. 2020-49, 2020-48 I.R.B. 1121, during which certain telephonic hearings are permitted.

26 CFR 601.601: Rules and Regulations. (Also: §§ 147, 1.147(f)-1)

Rev. Proc. 2021-37, page 385.

This revenue procedure sets forth the procedures of the IRS for issuing opinion letters regarding the satisfaction in form of § 403(b) pre-approved plans with respect to the requirements of § 403(b) of the Internal Revenue Code for the second remedial amendment cycle (Cycle 2). This revenue procedure also sets forth the rules for determining when remedial amendment periods expire for § 403(b) pre-approved plans.

Rev. Proc. 2021-38, page 425.

This revenue procedure modifies Rev. Proc. 2016-37 to extend the deadline for adopting an interim amendment for a § 401(a) pre-approved plan to match the deadline for adopting an interim amendment for a § 403(b) pre-approved plan, which is set forth in Rev. Proc. 2021-37.

Rev. Proc. 2021-40, page 426.

The IRS will not issue letter rulings on whether certain transactions are self-dealing within the meaning of section 4941(d) of the Code. Rev. Proc. 2021-3 is amplified.

26 CFR 601.201: Rulings and determination letters. (Also Part I, § 4941.)

Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).

Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period.

SECTION 1. PURPOSE

This annual notice provides the 2021-2022 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home, specifically (1) the special transportation industry meal and incidental expenses (M&IE) rates, (2) the rate for the incidental expenses only deduction, and (3) the rates and list of high-cost localities for purposes of the high-low substantiation method. This notice also modifies Notice 2020-71, 2020-40 I.R.B. 786, to change the portion of the year Sedona, Arizona is a high-cost locality under section 5 of Notice 2020-71.

SECTION 2. BACKGROUND

Rev. Proc. 2019-48, 2019-51 I.R.B. 1392 (or successor), provides rules for using a per diem rate to substantiate, under § 274(d) of the Internal Revenue Code and § 1.274-5 of the Income Tax Regulations, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home. Taxpayers using the rates and list of high-cost localities provided in this notice must comply with Rev. Proc. 2019-48 (or successor). Notice 2020-71, as modified by this notice, provides the rates and list of high-cost localities for the period October 1, 2020, to September 30, 2021.

SECTION 3. SPECIAL M&IE RATES FOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayers in the transportation industry are $69 for any locality of travel in the continental United States (CONUS) and $74 for any locality of travel outside the continental United States (OCONUS). See section 4.04 of Rev. Proc. 2019-48 (or successor).

SECTION 4. RATE FOR INCIDENTAL EXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUS locality of travel for the incidental expenses only deduction is $5 per day. See section 4.05 of Rev. Proc. 2019-48 (or successor).

SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

1. Annual high-low rates . For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2020-71 (the per diem substantiation method) are $296 for travel to any high-cost locality and $202 for travel to any other locality within CONUS. The amount of the $296 high rate and $202 low rate that is treated as paid for meals for purposes of § 274(n) is $74 for travel to any high-cost locality and $64 for travel to any other locality within CONUS. See section 5.02 of Rev. Proc. 2019-48 (or successor). The per diem rates in lieu of the rates described in Notice 2020-71 (the meal and incidental expenses only substantiation method) are $74 for travel to any high-cost locality and $64 for travel to any other locality within CONUS.

2. High-cost localities . The following localities have a federal per diem rate of $249 or more, and are high-cost localities for the specified portion of the calendar year.

3. Changes in high-cost localities . The list of high-cost localities in this notice differs from the list of high-cost localities in section 5 of Notice 2020-71.

a. The following locality has been added to the list of high-cost localities: Hilton Head, South Carolina.

b. The following locality has changed the portion of the year in which it is a high-cost locality: Jamestown/Middletown/Newport, Rhode Island.

c. The following locality has been removed from the list of high-cost localities: Gulf Breeze, Florida.

SECTION 6. MODIFICATION TO NOTICE 2020-71

The specified period for which Sedona, Arizona is a high cost locality under section 5, paragraph 2 of Notice 2020-71 is modified to be October 1, 2020 - December 31, 2020; March 1, 2021 - April 30, 2021; and September 1, 2021 - September 30, 2021. This section 6 is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020.

SECTION 7. EFFECTIVE DATE

Except as provided in section 6 of this notice, this notice is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2021, for travel away from home on or after October 1, 2021. For purposes of computing the amount allowable as a deduction for travel away from home, this notice is effective for meal and incidental expenses or for incidental expenses only paid or incurred on or after October 1, 2021. See sections 4.06 and 5.04 of Rev. Proc. 2019-48 (or successor) for transition rules for the last 3 months of calendar year 2021.

SECTION 8. EFFECT ON OTHER DOCUMENTS

Notice 2020-71 is modified and superseded.

DRAFTING INFORMATION

The principal author of this notice is James Liechty of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact James Liechty at (202) 317-7005 (not a toll-free number).

TABLE OF CONTENTS

Part i – overview.

.01 This revenue procedure sets forth the procedures of the Internal Revenue Service (IRS) for issuing Opinion Letters 1 regarding the satisfaction in form of § 403(b) Pre-approved Plans with respect to the requirements of § 403(b) of the Internal Revenue Code (Code) for the second Remedial Amendment Cycle (Cycle 2). This revenue procedure also sets forth the rules for determining when Remedial Amendment Periods expire for § 403(b) Pre-approved Plans.

.02 This revenue procedure modifies the procedures for the § 403(b) Pre-approved Plan program to be more similar to the procedures applicable under the § 401(a) pre-approved plan program in several ways, including:

simplifying the § 403(b) Pre-approved Plan program by eliminating the distinction between prototype and volume submitter plans;

providing that the IRS will issue a Cumulative List of Changes in the § 403(b) Requirements (Cumulative List) identifying the § 403(b) Requirements that the IRS will take into account in reviewing § 403(b) Pre-approved Plans submitted for Cycle 2;

making § 403(b) Pre-approved Plan program provisions regarding reliance on an Opinion Letter more similar to the provisions applicable under the § 401(a) pre-approved plan program, including provisions that permit the submission during the Employer Adoption Window of an application for a determination letter using Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans , by (1) an Adopting Employer of a Nonstandardized Plan that makes amendments to the plan that are not extensive, or (2) an Adopting Employer of any § 403(b) Pre-approved Plan (whether a Standardized Plan or a Nonstandardized Plan) that adds language to satisfy the requirements of § 415 due to the required aggregation of plans; 2 and

providing details regarding the system of cyclical Remedial Amendment Periods that follows the Initial Remedial Amendment Period.

.03 This revenue procedure provides that the On-Cycle Submission Period for Cycle 2 applications will begin on May 2, 2022, and end on May 1, 2023.

.04 This revenue procedure extends the plan amendment deadline for making interim amendments with respect to a change in § 403(b) Requirements, for most plans, until the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan.

.05 This revenue procedure sets forth the date on which the limited extension of the Initial Remedial Amendment Period described in section 4.11 3 expires and extends the deadline for adopting an initial amendment (if applicable) that is required under certain circumstances in order for the limited extension of the Initial Remedial Amendment Period to apply.

.06 This revenue procedure provides rules for permitting the participation of employees of certain church-related organizations, as described in § 414(e)(3)(B), in a § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account, including special rules for amending a Cycle 1 § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account to permit the participation of employees of certain church-related organizations, as described in § 414(e)(3)(B) retroactive to the beginning of Cycle 2.

.01 Final regulations under § 403(b) were published on July 26, 2007 (T.D. 9340, 72 FR 41128). Section 1.403(b)-3(b)(3)(i) generally provides that a contract does not satisfy the requirements of § 1.403(b)-3(a) (regarding exclusion of contributions from gross income) unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan that, in both form and operation, satisfies the requirements of the final regulations under § 403(b). 4

.02 Rev. Proc. 2013-22, 2013-18 I.R.B. 985, as modified by Rev. Proc. 2014-28, 2014-16 I.R.B. 944, and Rev. Proc. 2015-22, 2015-11 I.R.B. 754, and clarified by Rev. Proc. 2017-18, 2017-5 I.R.B. 743, 5 sets forth the procedures of the IRS for issuing opinion and advisory letters for § 403(b) Pre-approved Plans for Cycle 1, which began on the later of January 1, 2010, or the effective date of the plan, and that, ended on June 30, 2020. The IRS began accepting Cycle 1 applications for opinion and advisory letters regarding the acceptability under § 403(b) of the form of prototype plans and volume submitter plans, respectively, on June 28, 2013. Section 16.01 of Rev. Proc. 2013-22 provides that the IRS expects future guidance to require the restatement of every § 403(b) Pre-approved Plan by the plan’s Provider every six years. It further provides that upon issuance of a new opinion or advisory letter for the restated plan, Adopting Employers generally are required to adopt the restated plan. Section 4.01(3) of Rev. Proc. 2013-22 noted that the IRS was not establishing a determination letter program for § 403(b) plans at that time, so that an employer adopting a § 403(b) Pre-approved Plan would not be able to apply for an individual determination letter for the plan.

.03 Rev. Proc. 2013-22 provides that an employer that adopts a volume submitter plan and amends the terms of the approved specimen plan loses reliance on the advisory letter only to the extent of the amendment (as long as, after the amendment, the plan remains substantially similar to the terms of the approved specimen plan), but that the employer has no option to obtain a determination letter on the amended portions of the plan.

.04 The IRS issued Cycle 1 opinion and advisory letters for § 403(b) Pre-approved Plans beginning in March 2017. As provided in those letters, the IRS considered changes set forth in the final regulations under § 403(b) and the applicable requirements of the 2012 Cumulative List of Changes in Plan Qualification Requirements set forth in Notice 2012-76, 2012-52 I.R.B. 775.

.05 Rev. Proc. 2013-22 provides that a § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account may be maintained only by a Church or convention or association of churches, including an organization described in § 414(e)(3)(A), to provide benefits under § 403(b) for its employees or their beneficiaries as described in § 1.403(b)-9. Accordingly, under Rev. Proc. 2013-22, employees of a Qualified Church-Controlled Organization (QCCO) or a non-QCCO may not participate in a § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account.

.06 Section 21.02 of Rev. Proc. 2013-22 establishes an Initial Remedial Amendment Period, which permits an Eligible Employer to retroactively correct defects in the form of its written § 403(b) plan in order to satisfy the written plan requirement in the § 403(b) regulations by timely adopting a § 403(b) Pre-approved Plan or by otherwise timely amending its plan. Pursuant to section 21.02 of Rev. Proc. 2013-22, a defect in the form of a plan is a provision, or the absence of a required provision, that causes the plan to fail to satisfy the § 403(b) Requirements. Under this Initial Remedial Amendment Period, an Eligible Employer must amend its plan to the extent necessary to correct any Form Defects retroactive to the first day of the plan’s Initial Remedial Amendment Period. Section 21.02 of Rev. Proc. 2013-22 provides that the first day of the plan’s Initial Remedial Amendment Period is the later of January 1, 2010, or the effective date of the plan.

.07 Section 21.03 of Rev. Proc. 2013-22 provides, in general, that the form of a plan will be treated as satisfying the requirements of the § 403(b) regulations as of the first day of the plan’s Initial Remedial Amendment Period if (1) on or before that day, the Eligible Employer adopts a written plan that is intended to satisfy the § 403(b) Requirements, and (2) on or before the last day of the Initial Remedial Amendment Period, the employer amends the plan to the extent necessary to correct any Form Defects retroactive to the first day of the Initial Remedial Amendment Period.

.08 Section 21.05 of Rev. Proc. 2013-22 provides that the IRS will announce, in subsequent guidance, the expiration date of the Initial Remedial Amendment Period for all Eligible Employers.

.09 Rev. Proc. 2014-28 modifies Rev. Proc. 2013-22 to reduce the number of employers required to adopt a § 403(b) Pre-approved Plan, to permit an application for an advisory letter for a volume submitter specimen plan to be filed by a Mass Submitter on behalf of a minor modifier of the Mass Submitter’s plan, and to extend the deadline for submitting a § 403(b) Pre-approved Plan to the IRS for an opinion or advisory letter.

.10 Rev. Proc. 2015-22 modifies Rev. Proc. 2013-22 to change the address to which applications for an opinion or advisory letter should be submitted and to insert a user fee that was previously omitted.

.11 Rev. Proc. 2017-18 provides that the last day of the Initial Remedial Amendment Period is March 31, 2020. Rev. Proc. 2017-18 further provides that a plan that does not satisfy the § 403(b) Requirements in form on any day during the Initial Remedial Amendment Period will be considered to have satisfied those requirements if, on or before March 31, 2020, all provisions of the plan that are necessary to satisfy § 403(b) have been adopted and made effective in form and operation from the beginning of the Initial Remedial Amendment Period. 6

.12 Rev. Proc. 2019-39, 2019-42 I.R.B. 945, as modified by Notice 2020-35, 2020-25 I.R.B. 948, and Rev. Proc. 2020-40, 2020-38 I.R.B. 575, 7 establishes a system of § 403(b) Pre-approved Plan cycles during which a Provider may submit a § 403(b) Pre-approved Plan for review and approval by the IRS. Further, it sets forth a system of recurring Remedial Amendment Periods for correcting Form Defects in § 403(b) Pre-approved Plans first occurring after the Initial Remedial Amendment Period (that is, after June 30, 2020), and provides a limited extension of the Initial Remedial Amendment Period for certain Form Defects.

.13 Section 5 of Rev. Proc. 2019-39 establishes a system of recurring Remedial Amendment Periods for § 403(b) individually designed plan Form Defects first occurring after the Initial Remedial Amendment Period expires (that is, after June 30, 2020).

(1) Beginning of Remedial Amendment Period – Under this system, unless otherwise specified in guidance published in the Internal Revenue Bulletin, a Remedial Amendment Period for a Form Defect in a § 403(b) individually designed plan first occurring after the Initial Remedial Amendment Period, begins:

(a) in the case of a provision of, or absence of a provision from, a new plan, the date the plan is put into effect;

(b) in the case of an amendment to an existing plan (other than a Form Defect that is related to a change in § 403(b) Requirements, or that is integral to such a change), the date the plan amendment is adopted or put into effect, whichever is earlier;

(c) in the case of a provision that fails to satisfy the § 403(b) Requirements by reason of a change in those requirements, the date on which the change becomes effective with respect to the plan; or

(d) in the case of a provision that is integral to a § 403(b) Requirement that has been changed, the date the plan is first operated in accordance with the provision, as amended.

(2) Expiration of Remedial Amendment Period – Unless otherwise specified in guidance published in the Internal Revenue Bulletin, the expiration date for a Remedial Amendment Period for a Form Defect first occurring after the Initial Remedial Amendment Period is described in this section 2.13(2).

(a) New plan – In the case of a new plan, on the later of (i) the last day of the second calendar year following the calendar year in which the plan is put into effect, or (ii) in the case of a Governmental Plan, 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after the end of the plan’s initial plan year.

(b) Amendment to existing plan – In the case of an amendment to an existing plan not relating to, or integral to, a change in § 403(b) Requirements, on the later of (i) the last day of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later, or (ii) in the case of a Governmental Plan, 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins following the calendar year in which the amendment is adopted or effective, whichever is later.

(c) Change in § 403(b) Requirements – In the case of a provision that is related to, or integral to, a change in § 403(b) Requirements, on the later of (i) the last day of the second calendar year that begins after the issuance of the Required Amendments List (described in section 8 of Rev. Proc. 2019-39) in which the change in § 403(b) Requirements appears, or (ii) in the case of a Governmental Plan, 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date of issuance of the Required Amendments List in which the change in § 403(b) Requirements appears.

.14 Sections 10 and 11 of Rev. Proc. 2019-39 establish a system of cyclical § 403(b) Pre-approved Plan Remedial Amendment Periods following the expiration of the Initial Remedial Amendment Period (that is, after June 30, 2020). Section 10.02 and 10.03 of Rev. Proc. 2019-39 provide that the period covered by the Initial Remedial Amendment Period is referred to as Cycle 1 and that Cycle 2 begins after the Initial Remedial Amendment Period expires.

.15 Section 11.02 of Rev. Proc. 2019-39 provides that the beginning date of the Remedial Amendment Period with respect to a Form Defect first occurring in a § 403(b) Pre-approved Plan after the Initial Remedial Amendment Period is the same date that would be applicable if that Form Defect had occurred in an individually designed plan (see section 2.13(1) of this revenue procedure for a description of the date a Remedial Amendment Period begins).

.16 Section 11.03 of Rev. Proc. 2019-39 provides that, except as otherwise provided by statute, or in regulations or other guidance published in the Internal Revenue Bulletin, and provided that an interim amendment (if applicable) is made timely and in good faith with the intent of complying with the § 403(b) Requirements, the Remedial Amendment Period with respect to a § 403(b) Pre-approved Plan Form Defect first occurring after the Initial Remedial Amendment Period will end no earlier than the end of Cycle 2 and that the IRS intends to issue guidance providing additional rules for determining the end of the Remedial Amendment Period.

.17 Section 11.04 of Rev. Proc. 2019-39 provides that an Eligible Employer adopting a § 403(b) Pre-approved Plan generally must adopt an interim amendment with respect to a change in § 403(b) Requirements.

.18 Section 12 of Rev. Proc. 2019-39 sets forth plan amendment deadlines for interim amendments made to a § 403(b) Pre-approved Plan. In relevant part, section 12 of Rev. Proc. 2019-39 provides that a Provider (or Eligible Employer) is considered to have adopted an interim amendment timely if the amendment is adopted by the later of (1) the end of the calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan, or (2) in the case of a Governmental Plan, the later of (a) the end of the calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan, or (b) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the plan amendment becomes effective.

.19 Section 13 of Rev. Proc. 2019-39 provides a limited extension of the Initial Remedial Amendment Period with respect to certain § 403(b) Pre-approved Plan Form Defects first occurring during Cycle 1, so that the Initial Remedial Amendment Period will end no earlier than the end of Cycle 2. Section 13 of Rev. Proc. 2019-39 also provides that, prior to the end of Cycle 2, the IRS will issue guidance providing rules for determining when the limited extension of the Initial Remedial Amendment Period expires with respect to a § 403(b) Pre-approved Plan Form Defect first occurring during Cycle 1. See section 4.11 of this revenue procedure for more details regarding the limited extension of the Initial Remedial Amendment Period.

.20 Notice 2020-35, in relevant part, modifies Rev. Proc. 2017-18 and Rev. Proc. 2019-39 to change the expiration date of the Initial Remedial Amendment Period, and all dates that are based on the expiration of the Initial Remedial Amendment Period, from March 31, 2020 to June 30, 2020.

.21 Rev. Proc. 2020-40 modifies Rev. Proc. 2019-39 to expand the situations in which the plan amendment deadline for discretionary amendments made to a § 403(b) Pre-approved Plan may be extended.

.22 Section 111 of Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019), known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), provides that a Retirement Income Account may provide benefits for an employee described in § 414(e)(3)(B) (which includes employees of a tax-exempt organization that is controlled by or associated with a church or convention or association of churches, such as employees of a QCCO or a Non-QCCO).

.23 Rev. Proc. 2016-37, 2016-29 I.R.B. 136, as modified by Rev. Proc. 2017-41, 2017-29 I.R.B. 92, and Rev. Proc. 2020-40, sets forth rules for a regular six-year remedial amendment cycle for § 401(a) pre-approved plans and an extension of the remedial amendment period and adoption deadline for plan amendments for § 401(a) pre-approved plans.

.24 Rev. Proc. 2017-41, as modified by Rev. Proc. 2018-21, 2018-14 I.R.B. 467, Rev. Proc. 2018-42, 2018-36 I.R.B. 424, Rev. Proc. 2020-10, 2020-2 I.R.B. 295, and Notice 2020-35, sets forth the procedures of the IRS for issuing opinion letters regarding the qualification in form of § 401(a) pre-approved plans.

.25 Rev. Proc. 2021-4, 2021-1 I.R.B. 157 (as updated annually), sets forth the general procedures of the IRS regarding the issuance of Employee Plans determination letters, including determination letters for § 401(a) pre-approved plans.

SECTION 3. SIGNIFICANT PROVISIONS

.01 This revenue procedure significantly modifies the procedures set forth in Rev. Proc. 2013-22 for issuing an Opinion Letter regarding the satisfaction of the form of a § 403(b) Pre-approved Plan with respect to the § 403(b) Requirements. These modifications generally make the § 403(b) Pre-approved Plan program more similar to the § 401(a) pre-approved plan program.

.02 The prototype and volume submitter programs are combined and replaced by a single Opinion Letter program that provides for two types of plans: Standardized Plans and Nonstandardized Plans. See section 4.27.

.03 A § 403(b) Pre-approved Plan may utilize either of two formats: a single plan document or a basic plan document with an adoption agreement. See section 4.27.

.04 An Adopting Employer of a Nonstandardized Plan that makes amendments to the plan that are not extensive will lose reliance on the Nonstandardized Plan’s Opinion Letter, but may obtain reliance that the form of the plan, as amended, satisfies the § 403(b) Requirements by requesting a determination letter using Form 5307 (as updated), under procedures similar to the procedures applicable to § 401(a) pre-approved plans. See section 8.04. In addition, an Adopting Employer of any § 403(b) Pre-approved Plan (whether a Standardized Plan or a Nonstandardized Plan) that adds language to satisfy the requirements of § 415 due to the required aggregation of plans may obtain reliance with regard to § 415 by applying for a determination letter using Form 5307 (as updated), under procedures similar to the procedures applicable to § 401(a) pre-approved plans. See section 8.04.

.05 The On-Cycle Submission Period for Cycle 2 will begin on May 2, 2022, and end on May 1, 2023. See section 10.02.

.06 Prior to the On-Cycle Submission Period for Cycle 2, the IRS will issue a Cumulative List that identifies changes in the § 403(b) Requirements that will be taken into account with respect to a plan document submitted to the IRS for Cycle 2 and that were not taken into account by the IRS in its review during Cycle 1. See section 13.02.

.07 Applications for a minor modifier adopter of a Mass Submitter’s § 403(b) Pre-approved Plan with respect to a Cycle will no longer be accepted after that Cycle’s Employer Adoption Window begins. See section 12.02.

.08 All § 403(b) Pre-approved Plans are required to provide a definition of Employee. See section 5.13.

.09 Any Nonstandardized Plan may provide for either safe harbor or non-safe harbor hardship distributions. See section 6.03.

.10 An employee described in § 414(e)(3)(B) is permitted to participate in a § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account. See section 4.26. Additionally, a Cycle 1 § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account may be amended to permit the participation of employees of certain church-related organizations, as described in § 414(e)(3)(B), retroactive to the beginning of Cycle 2. See section 25.

.11 The expiration date of the Remedial Amendment Period for Form Defects first occurring after June 30, 2020, in a § 403(b) Pre-approved Plan is provided. See section 21.

.12 The amendment deadline for an interim amendment to a § 403(b) Pre-approved Plan that is not a Governmental Plan is the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective. Similarly, a later deadline is provided for a § 403(b) Pre-approved Plan that is a Governmental Plan. See section 22.

.13 The expiration date of the limited extension of the Initial Remedial Amendment Period for certain Form Defects is provided. See section 23.01. In addition, the deadline for the initial amendment related to that extension for certain Form Defects is delayed until the later of June 30, 2020, or the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to a plan. See section 23.02.

.14 The Department of the Treasury (Treasury Department) and the IRS expect to continue to update this Opinion Letter program revenue procedure, in whole or in part, from time to time, including providing further improvements based on comments received. Accordingly, the Treasury Department and the IRS continue to invite further comments on how to improve the Opinion Letter program. For information on how to submit comments, see section 28.

SECTION 4. DEFINITIONS

.01 Adopting Employer – An “Adopting Employer” is an Eligible Employer that adopts a § 403(b) Pre-approved Plan offered by a Provider, including a plan that is word-for-word identical to, or a Minor Modification of, a plan of a Mass Submitter.

.02 Adoption Agreement Plan – See section 4.27(2).

.03 Church – A “Church” is a church within the meaning of § 3121(w)(3)(A).

.04 Cycle – A “Cycle” is a Remedial Amendment Cycle, as defined in section 4.24.

.05 Eligible Employer – An “Eligible Employer” is an employer described in § 403(b)(1)(A).

.06 Employer Adoption Window – See section 4.24.

.07 Existing § 403(b) Pre-approved Plan – See section 4.27(3)(c).

.08 Flexible Plan – See section 4.14.

.09 Form Defect – A “Form Defect” is:

(1) a provision that causes a plan to fail to satisfy the § 403(b) Requirements;

(2) the absence of a provision that causes a plan to fail to satisfy the § 403(b) Requirements;

(3) a provision of a plan that is integral to a § 403(b) Requirement that has been changed (either by statute, or in regulations or other guidance published in the Internal Revenue Bulletin); or

(4) the absence from a plan of a provision required by a change to the § 403(b) Requirements (either by statute, or in regulations or other guidance published in the Internal Revenue Bulletin) or integral to the change.

.10 Governmental Plan – A “Governmental Plan” is a governmental plan within the meaning of § 414(d).

.11 Initial Remedial Amendment Period

(1) A plan’s “Initial Remedial Amendment Period” is the Remedial Amendment Period provided under Rev. Proc. 2013-22 that began on the later of January 1, 2010, or the effective date of the plan, and that, pursuant to Rev. Proc. 2017-18, as modified by Notice 2020-35, expired on June 30, 2020.

(2) Section 13 of Rev. Proc. 2019-39 provides a “limited extension of the Initial Remedial Amendment Period,” so that the Initial Remedial Amendment Period will end no earlier than the end of Cycle 2. See section 23.01 of this revenue procedure for more details on the expiration of the limited extension of the Initial Remedial Amendment Period. The limited extension of the Initial Remedial Amendment Period applies to a Form Defect that: (a) either (i) results in the failure of the plan to satisfy the § 403(b) Requirements by reason of a change in those requirements, or (ii) is integral to the § 403(b) Requirement that has been changed, and (b) first occurs on or after January 1, 2018.

(3) Section 13.03 of Rev. Proc. 2019-39 provides that an “initial amendment” that is intended in good faith to correct a Form Defect must be timely adopted by the Provider (or the Adopting Employer, if applicable) for the limited extension of the Initial Remedial Amendment Period to apply. To be considered timely, section 13.03 of Rev. Proc. 2019-39 provides that the initial amendment must be adopted by the later of (a) the expiration of the Initial Remedial Amendment Period (that is, June 30, 2020), or (b) the end of the calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan. However, section 23.02 of this revenue procedure extends the deadline for the initial amendment.

.12 Interim § 403(b) Pre-approved Plan – See section 4.27(3)(a).

.13 Investment Arrangement – An “Investment Arrangement” is a funding arrangement under a § 403(b) plan. An Investment Arrangement may be an annuity contract under § 1.403(b)-2(b)(2), a custodial account under § 403(b)(7), or a Retirement Income Account.

.14 Mass Submitter – A “Mass Submitter” is any person that: (1) has an established place of business in the United States where it is accessible during every business day, and (2) submits Opinion Letter applications on behalf of at least 15 unaffiliated Providers, each of which is offering, on a word-for-word identical basis, the same plan. A Flexible Plan, as defined in section 11.03(1), that is offered by a Provider is considered a word-for-word identical plan. For purposes of determining whether 15 unaffiliated Providers offer, on a word-for-word basis, the same § 403(b) Pre-approved Plan, a Mass Submitter that is also a Provider is treated as an unaffiliated Provider. For purposes of this definition, affiliation is determined under § 414(b) and (c). Any law firm, accounting firm, consulting firm, or similar organization, will be considered to be affiliated with its partners, members, associates, or similar affiliated persons. A Mass Submitter is treated as a Mass Submitter with respect to all of its plans, provided the 15 unaffiliated Provider requirement is met with respect to at least one plan. See section 11 for rules relating to Mass Submitter plans.

.15 Minor Modification – See section 11.03(2).

.16 Newly Approved § 403(b) Pre-approved Plan – See section 4.27(3)(b).

.17 Non-qualified Church-Controlled Organization or Non-QCCO – A “Non-qualified Church-Controlled Organization” or “Non-QCCO” is a church-controlled tax-exempt organization described in § 501(c)(3) that is not a QCCO.

.18 Nonstandardized Plan – A “Nonstandardized Plan” is a § 403(b) Pre-approved Plan that is not a Standardized Plan.

.19 On-Cycle Submission Period – See section 4.24.

.20 Opinion Letter – An “Opinion Letter” is a written statement issued by the IRS to a Provider or Mass Submitter that the form of a § 403(b) Pre-approved Plan satisfies the § 403(b) Requirements. For purposes of this revenue procedure, an opinion letter for a prototype plan or an advisory letter for a volume submitter plan issued pursuant to Rev. Proc. 2013-22 is considered a Cycle 1 Opinion Letter. An Opinion Letter issued under this revenue procedure is referred to as a Cycle 2 Opinion Letter.

.21 Provider

(1) A “Provider” is any person (including, if applicable, a Mass Submitter) that: (a) has an established place of business in the United States where it is accessible during every business day, and (b) represents to the IRS in its application for an Opinion Letter that it reasonably expects at least 15 Eligible Employers to adopt one of the § 403(b) Pre-approved Plans of the Provider. Notwithstanding the preceding sentence, a person that is otherwise eligible to be a Provider generally may apply for an Opinion Letter for a plan that is intended to be a Retirement Income Account without satisfying the 15-Eligible-Employer requirement with respect to that plan. However, if that person also applies for an Opinion Letter with respect to a § 403(b) Pre-approved Plan that is not a Retirement Income Account, the person would need to meet the 15-Eligible-Employer requirement for the plan that is not a Retirement Income Account. A Provider may apply for Opinion Letters for any number of § 403(b) Pre-approved Plans.

(2) The IRS reserves the right at any time to request from a Provider a list of the Eligible Employers that have adopted or are expected to adopt the Provider’s plans, including the employers’ business addresses and employer identification numbers.

(3) Notwithstanding the preceding provisions of this section 4.21, any person that has an established place of business in the United States where it is accessible during every business day may be a Provider that offers a plan that is word-for-word identical to a plan of a Mass Submitter (as an identical adopter) or a plan that includes Minor Modifications to a plan of a Mass Submitter (as a minor modifier adopter) regardless of the number of Eligible Employers that are expected to adopt the plan. See section 11 for rules relating to Mass Submitter plans, including procedures for identical adopters and minor modifier adopters of Mass Submitter plans.

(4) By submitting an application for an Opinion Letter for a § 403(b) Pre-approved Plan under this revenue procedure (or by having an application filed on its behalf by a Mass Submitter), a person represents to the IRS that it is a Provider, and that it agrees to comply with any requirements imposed on Providers by this revenue procedure. Failure to comply with these requirements may result in the loss of eligibility to offer § 403(b) Pre-approved Plans and the revocation of Opinion Letters that have been issued to the Provider.

.22 Qualified Church-Controlled Organization or QCCO – A “Qualified Church-Controlled Organization” or “QCCO” is a church-controlled tax-exempt organization described in § 501(c)(3) that is a qualified church-controlled organization within the meaning of § 3121(w)(3)(B).

.23 Related Employers – For a plan that is not a Governmental Plan, “Related Employers” means all employers that are aggregated with the Adopting Employer under § 414(b) and (c) (each as modified by § 415(h)), (m), and (o) and the regulations thereunder. For a Governmental Plan, “Related Employers” means all employers that are aggregated with the Adopting Employer in a manner consistent with Notice 89-23, 1989-1 C.B. 654.

.24 Remedial Amendment Cycle – A “Remedial Amendment Cycle” or “Cycle” means one of a series of recurring Remedial Amendment Periods applicable to § 403(b) Pre-approved Plans, during which a Provider submits a proposed § 403(b) Pre-approved Plan for review and approval by the IRS, and during which the plan, once approved, is adopted by Eligible Employers. Providers and Mass Submitters must submit applications for an Opinion Letter during the one-year submission period (referred to as the On-Cycle Submission Period) that relates to an applicable Cycle. When the review of § 403(b) Pre-approved Plan documents for a specific Cycle is close to being completed, the IRS will announce the date by which Adopting Employers must adopt Newly Approved § 403(b) Pre-approved Plans. Depending upon the length of the IRS review process, Eligible Employers will have approximately a two-year period to adopt the updated plan (Employer Adoption Window). A Cycle ends at the end of the last day of the Employer Adoption Window for that Cycle. The next Cycle begins on the following day. The On-Cycle Submission Period for a Cycle may begin after the start of that Cycle.

.25 Remedial Amendment Period – The “Remedial Amendment Period” is the period during which a § 403(b) plan may be amended to comply retroactively with the § 403(b) Requirements. As provided in section 11.01 of Rev. Proc. 2019-39, as part of the correction of a Form Defect within the Remedial Amendment Period for the Form Defect, an Adopting Employer must conform the operation of the § 403(b) Pre-approved Plan to match the correction of the Form Defect retroactive to the beginning of the Remedial Amendment Period for the Form Defect. See section 2.13(1) of this revenue procedure for a description of when the Remedial Amendment Period for a Form Defect in a § 403(b) Pre-approved Plan begins. See section 21 of this revenue procedure for a description of when the Remedial Amendment Period for a Form Defect in a § 403(b) Pre-approved Plan expires.

.26 Retirement Income Account – A “Retirement Income Account” is a defined contribution program established or maintained by a Church, including an organization described in § 414(e)(3)(A), to provide benefits under § 403(b) for an employee described in § 403(b)(1) (including an employee described in § 414(e)(3)(B)) or his or her beneficiaries, as described in § 403(b)(9).

.27 § 403(b) Pre-approved Plan

(1) A “§ 403(b) Pre-approved Plan” is a § 403(b) plan (including a plan covering self-employed individuals) that is made available by a Provider for adoption by Eligible Employers. The two types of § 403(b) Pre-approved Plans are Standardized Plans and Nonstandardized Plans. A § 403(b) Pre-approved Plan includes an Interim § 403(b) Pre-approved Plan, a Newly Approved § 403(b) Pre-approved Plan, and an Existing § 403(b) Pre-approved Plan, as described in this section 4.27.

(2) A § 403(b) Pre-approved Plan may be structured as an “Adoption Agreement Plan” or as a “Single Document Plan.” An Adoption Agreement Plan consists of a basic plan document and an adoption agreement. The basic plan document includes all of the nonelective provisions applicable to all Adopting Employers, and the adoption agreement includes the options that may be selected by each Adopting Employer. No options (including blanks to be completed) may be provided in the basic plan document portion of the Adoption Agreement Plan (except as provided in section 11.03(1) regarding Flexible Plans). A Single Document Plan consists of a single plan document offered by a Provider without an adoption agreement. A Single Document Plan may include alternate paragraphs and options (including blanks to be completed by the Adopting Employer in accordance with specified parameters) that may be selected by an Adopting Employer.

(3) Categories of § 403(b) Pre-approved Plans . The following categories of § 403(b) Pre-approved Plans apply with respect to a Cycle.

(a) Interim § 403(b) Pre-approved Plan – An “Interim § 403(b) Pre-approved Plan,” which is a plan (other than a Newly Approved § 403(b) Pre-approved Plan) that was not in existence in the immediately preceding Cycle and that has been or will be submitted for an Opinion Letter for the Cycle.

(b) Newly Approved § 403(b) Pre-approved Plan – A “Newly Approved § 403(b) Pre-approved Plan,” which is a plan for which an Opinion Letter has been issued for the Cycle.

(c) Existing § 403(b) Pre-approved Plan – An “Existing § 403(b) Pre-approved Plan,” which is a plan (other than a Newly Approved § 403(b) Pre-approved Plan) that has received an Opinion Letter for the immediately preceding Cycle.

.28 § 403(b) Requirements – The “§ 403(b) Requirements” are the requirements of § 403(b), including requirements provided in the Code, regulations, and other guidance published in the Internal Revenue Bulletin.

.29 Single Document Plan – See section 4.27(2).

.30 Standardized Plan – A “Standardized Plan” is a § 403(b) Pre-approved Plan that meets the requirements set forth in section 5.18.

PART II – PROCEDURES FOR APPLICATIONS FOR § 403(b) PRE-APPROVED PLANS

Section 5. provisions required in § 403(b) pre-approved plans.

.01 Provisions required in all § 403(b) Pre-approved Plans – Each § 403(b) Pre-approved Plan must comply with the requirements set forth in sections 5.03 through 5.17.

.02 Additional provisions – Section 5.18 sets forth additional provisions required for all Standardized Plans. If a § 403(b) Pre-approved Plan is intended to be a Retirement Income Account, the plan also must include the provisions set forth in section 5.19.

.03 Inclusion of Investment Arrangements in the § 403(b) Pre-approved Plan – A § 403(b) Pre-approved Plan includes the Investment Arrangements under the plan in addition to the single plan document or the basic plan document and adoption agreement. Every § 403(b) Pre-approved Plan must therefore incorporate by reference the terms of the Investment Arrangements under the plan. While the IRS’s review of an application for an Opinion Letter is limited to the terms of the single plan document or the basic plan document and adoption agreement, as applicable, the terms of Investment Arrangements and other documents that are incorporated by reference in the plan must satisfy applicable law and may not have any provisions that are inconsistent with § 403(b). For example, if the forms of annuity benefit available under a plan are described in Investment Arrangements under the plan, the terms of the Investment Arrangements must satisfy, if applicable to the plan, the joint and survivor annuity requirements of ERISA § 205 and any applicable related rules, such as rules relating to transfers of benefits that are subject to the joint and survivor annuity requirement, and may not have any provisions that are inconsistent with § 403(b).

.04 Provision regarding conflicting provisions in Investment Arrangement or other documents – Each § 403(b) Pre-approved Plan must provide that, in the event of any conflict between the terms of the single plan document or the basic plan document and adoption agreement, as applicable, and the terms of Investment Arrangements under the plan (or of any other documents incorporated by reference into the plan), the terms of the single plan document or the basic plan document and adoption agreement, as applicable, shall govern. See section 8.03(4) for the effect on reliance in the event of a conflict. An Eligible Employer that adopts a § 403(b) Pre-approved Plan should take this requirement into account in considering Investment Arrangements to be offered under the plan as well as other documents that may be incorporated by reference. Since the terms of Investment Arrangements under a § 403(b) Pre-approved Plan must be incorporated by reference into the plan and those arrangements may not have any provisions that are inconsistent with § 403(b), plan terms that are required in a single plan document or the basic plan document and adoption agreement, as applicable, under this section 5 should not create a conflict with the terms of the Investment Arrangements under a properly drafted § 403(b) Pre-approved Plan. If there nevertheless is a conflict, the terms of the single plan document or the basic plan document and adoption agreement, as applicable, must control. The IRS anticipates providing updated sample plan language (Listing of Required Modifications or LRMs) before the On-Cycle Submission Period with respect to a Cycle begins.

.05 Plan must satisfy § 403(b) Requirements independent of Investment Arrangements – The IRS’s review of a § 403(b) Pre-approved Plan will consider only the terms of the single plan document or the basic plan document and adoption agreement, as applicable. Accordingly, the provisions described in sections 5.03 through 5.17 (and sections 5.18 and 5.19, if applicable) must be included in the single plan document or the basic plan document or adoption agreement, as appropriate, of every § 403(b) Pre-approved Plan, regardless of the terms of any Investment Arrangements under the plan or any other documents that may be incorporated by reference. This does not preclude the adoption of a § 403(b) Pre-approved Plan (including a Standardized Plan) if different Investment Arrangements under a plan have different features or prevent the inclusion of additional provisions in the terms of the Investment Arrangements under the plan or other documents incorporated by reference. Nor does it prevent a § 403(b) Pre-approved Plan from using Investment Arrangements that are more restrictive than required by § 403(b) or the single plan document or the basic plan document and adoption agreement. However, the terms of the single plan document or the basic plan document and adoption agreement, as applicable, must satisfy the requirements of applicable law and sections 5.03 through 5.17 (and sections 5.18 and 5.19, if applicable) independent of any Investment Arrangements under the plan or any other documents incorporated by reference. For example, an Adopting Employer’s Adoption Agreement Plan may offer both Investment Arrangements that permit loans and Investment Arrangements that do not permit loans. In this case, (1) the basic plan document must include provisions reflecting the § 403(b) Requirements, including § 1.403(b)-6, and § 1.72(p)-1, and (2) the basic plan document and adoption agreement, as completed by the Adopting Employer, must provide that, to the extent permitted by the terms governing the applicable Investment Arrangement, participant loans are available. Similarly, for example, if an Adopting Employer’s Single Document Plan offers both Investment Arrangements that permit loans and Investment Arrangements that do not permit loans, then the single plan document must include provisions reflecting the § 403(b) Requirements, including § 1.403(b)-6, and § 1.72(p)-1, and must provide that, to the extent permitted by the terms governing the applicable Investment Arrangement, participant loans are available. The IRS anticipates providing updated LRMs before the On-Cycle Submission Period with respect to a Cycle begins.

.06 Vesting – A § 403(b) Pre-approved Plan may provide a vesting schedule for contributions other than elective deferrals, rather than provide for full and immediate vesting of the contributions. Except in the case of certain Nonstandardized Plans described in this section 5.06, contributions other than elective deferrals (and earnings thereon) under a § 403(b) Pre-approved Plan must vest at least as rapidly as would be required to satisfy the minimum vesting requirements of § 411(a)(2)(B) applicable to a qualified plan under § 401(a), even if the plan is not subject to the parallel minimum vesting requirements under ERISA § 203. A Nonstandardized Plan that is designed to be used for a plan that is not subject to the minimum vesting requirements of ERISA § 203 (for example, a Governmental Plan) is not required to provide that contributions other than elective deferrals will vest at least as rapidly as would be required to satisfy § 411(a)(2)(B). Every § 403(b) Pre-approved Plan that provides a vesting schedule for contributions other than elective deferrals must also satisfy the following requirements: (1) the portion of a participant’s interest in the plan that is not vested must be maintained in a separate account for the participant that is treated as a separate contract to which § 403(c) (or, in case of a Custodial Account, § 401(a)) applies, (2) as amounts in the participant’s separate account become nonforfeitable, they must be removed from the separate account and treated as amounts held under a § 403(b) plan, to the extent permitted under § 1.403(b)-3(d)(2)(ii), and (3) all nonvested amounts remaining in the participant’s separate account must become nonforfeitable upon termination of the plan.

.07 Appendix of administrative responsibilities – Every § 403(b) Pre-approved Plan must provide that an appendix to the plan will identify the parties responsible for the various administrative functions under the plan that are necessary to comply with the § 403(b) Requirements and other tax requirements, including the requirements that apply on the basis of the aggregated Investment Arrangements issued to a participant under the plan, and will list all the vendors of Investment Arrangements approved for use under the plan. Changes to the information in the required appendix will not affect the Adopting Employer’s ability to rely on an Opinion Letter.

.08 Provider amendments – Each § 403(b) Pre-approved Plan must include a procedure for amendments by the Provider, so that changes in the Code, regulations, or other guidance published in the Internal Revenue Bulletin, and any correction of the plan, may be applied to all Adopting Employers. The procedure for amendments by the Provider also must state that, for purposes of reliance on the Opinion Letter, the Provider will no longer have the authority to amend the plan on behalf of the Adopting Employer as of the date the plan is treated as an individually designed plan pursuant to section 9.05.

.09 Adopting Employer modification to satisfy § 415 – Each § 403(b) Pre-approved Plan must provide that plan provisions may be amended by the Adopting Employer to the extent necessary to satisfy § 415 because of the required aggregation of multiple plans under that section. Generally, a space should be provided in the plan with instructions for the Adopting Employer to add language as necessary to satisfy § 415. These provisions must be included in the adoption agreement of an Adoption Agreement Plan.

.10 Provisions regarding reliance – Each § 403(b) Pre-approved Plan must include, in close proximity to the signature line, a statement that describes the limitations on employer reliance on an Opinion Letter. See section 8.

.11 Requirements regarding dated signatures and adoption agreement provisions – Each § 403(b) Pre-approved Plan must include an Adopting Employer signature and date line. The plan also must include a statement that the Provider will inform the Adopting Employer of any amendments made to the plan or of the discontinuance of the plan. The Adopting Employer must sign and date the adoption agreement or signature page of the plan when it first adopts the plan and must complete, sign, and date a new adoption agreement or signature page if the plan has been restated. In addition, the Adopting Employer must complete a new dated adoption agreement or signature page if it modifies any prior elections or makes new elections. The signature requirement may be satisfied by an electronic signature that reliably authenticates and verifies the adoption of the adoption agreement or single plan document, or the restatement, amendment, or modification thereof, by the Adopting Employer. In the case of an Adoption Agreement Plan, the adoption agreement must state that it is to be used with only one basic plan document and must identify that document. In addition, the adoption agreement must include a cautionary statement to the effect that the failure to properly complete the adoption agreement may result in failure of the form of the plan to meet the § 403(b) Requirements.

.12 Provider telephone numbers – Each § 403(b) Pre-approved Plan must include the Provider’s name, address, and telephone number (or a space for the address and telephone number of the Provider’s authorized representative) for inquiries by Adopting Employers regarding the adoption of the plan, the meaning of plan provisions, or the effect of the Opinion Letter.

.13 Definition of employee – Each § 403(b) Pre-approved Plan that is not a Governmental Plan must define an employee as any employee of the Adopting Employer maintaining the plan or any other Eligible Employer aggregated with that Adopting Employer under § 414(b), (c), (m), or (o) and the regulations thereunder. Each § 403(b) Pre-approved Plan that is a Governmental Plan must define an employee as any employee of the Adopting Employer maintaining the plan or any other Eligible Employer aggregated with that Adopting Employer in a manner consistent with Notice 89-23.

.14 Crediting of service taking into account § 414(b), (c), (m), and (o) – Each § 403(b) Pre-approved Plan that is not a Governmental Plan must credit all service with any employer aggregated with the Adopting Employer under § 414(b), (c), (m), or (o) and the regulations thereunder, as service with the Adopting Employer maintaining the plan. Each § 403(b) Pre-approved Plan that is a Governmental Plan must credit all service with any employer aggregated with the Adopting Employer in a manner consistent with Notice 89-23, as service with the Adopting Employer maintaining the plan.

.15 Uniformed Services Employment and Reemployment Rights Act and § 414(u) – Each § 403(b) Pre-approved Plan must include a provision reflecting the requirements of § 414(u). See Rev. Proc. 96-49, 1996-2 C.B. 369.

.16 Separate § 403(b) Pre-approved Plan for Retirement Income Account – A single § 403(b) Pre-approved Plan may not be used for both a § 403(b) Pre-approved Plan that is a Retirement Income Account and a § 403(b) Pre-approved Plan that is not a Retirement Income Account. Thus, a separate § 403(b) Pre-approved Plan is required for a plan that is intended to constitute a Retirement Income Account.

.17 Identifying category of Eligible Employer and plan – The adoption agreement or single plan document of every § 403(b) Pre-approved Plan must satisfy the following requirements:

(1) Although a single adoption agreement may be made available to different categories of Eligible Employers, the adoption agreement must require the Adopting Employer to show its status as an Eligible Employer by indicating whether the Adopting Employer is:

(a) a government-sponsored educational organization described in § 170(b)(1)(A)(ii) (a public school);

(b) a tax-exempt organization described in § 501(c)(3) that is exempt from tax under § 501(a);

(c) an employer of a minister described in § 414(e)(5)(A); or

(d) a minister described in § 414(e)(5)(A).

(2) The adoption agreement or single plan document must require the Adopting Employer to show its status with respect to the nondiscrimination requirements in § 1.403(b)-5 by indicating whether the plan is:

(a) a Governmental Plan;

(b) a plan of an Adopting Employer that is a Church or QCCO for employees of the Church or QCCO; or

(c) any plan not described in (a) or (b).

.18 Provisions applicable to Standardized Plans – In addition to the requirements set forth in sections 5.03 through 5.17, each Standardized Plan must either provide that the only contributions that an Adopting Employer may elect to provide under the plan are elective deferrals or meet the following requirements:

(1) Under § 1.415(f)-1(a)(3), all § 403(b) annuity contracts purchased by an employer for a participant are treated as one § 403(b) annuity contract for purposes of § 415. Section 1.415(f)-1(f)(2) includes a special rule providing that, if a participant on whose behalf a § 403(b) annuity contract is purchased is in control of any employer for a limitation year, the § 403(b) annuity contract is aggregated with all other defined contribution plans maintained by that employer. For these purposes, a custodial account and a Retirement Income Account are treated as a § 403(b) annuity contract. Every Standardized Plan must include plan language reflecting these rules. In particular, the plan language must coordinate the application of the § 415 limits to all the Standardized Plans of the Adopting Employer and its Related Employers so that, if the only § 403(b) plans maintained by the Adopting Employer and its Related Employers are Standardized Plans, the plans will satisfy § 415(c) and § 1.415(f)-1(a)(3) without requiring the addition of overriding plan language.

(2) Under the provisions governing eligibility and participation, the plan by its terms benefits all employees except those who may be excluded under § 1.410(b)-6. The plan may provide options as to whether some or all of the employees described in § 1.410(b)-6 are excluded, provided that the criteria for excluding employees described in § 1.410(b)-6 apply uniformly to all employees. A Standardized Plan generally may not deny an allocation to an employee eligible to participate merely because the employee is not an active employee on the last day of the plan year or has failed to complete a specified number of hours of service during the year. However, the plan may deny an allocation to an employee who is eligible to participate if the employee terminates service during the plan year with not more than 500 hours of service and is not an active employee on the last day of the plan year. A plan will not fail to satisfy the requirements of this section 5.18(2) with respect to contributions other than elective deferrals merely because the plan provides, either as the result of an elective provision or by default in the absence of an election to the contrary, that individuals who become employees, within the meaning of section 5.13, as a result of a transaction described in § 410(b)(6)(C) are excluded from eligibility to participate in the plan during the period beginning on the date of the transaction and ending on a date that is not later than the earlier of the last day of the first plan year beginning after the date of the transaction or the date of a significant change in the plan or in the coverage of the plan. A transaction described in § 410(b)(6)(C) is an asset or stock acquisition, merger, or other similar transaction involving a change in the employer of the employees of a trade or business.

(3) The eligibility requirements under the plan are not more favorable for highly compensated employees (as defined in § 414(q)) than for other employees.

(4) Under the plan, allocations are determined on the basis of total compensation. The plan must provide that, for purposes of allocations, the definition of total compensation is all compensation within the meaning of § 415(c)(3), excluding all other compensation, or compensation that otherwise satisfies § 414(s) and § 1.414(s)-1(c).

(5) If the plan provides for contributions other than elective deferrals and matching contributions, the plan must satisfy one of the design-based safe harbors described in § 1.401(a)(4)-2(b)(2) with respect to the contributions.

(6) All benefits, rights, and features under the plan (other than those, if any, that have been prospectively eliminated) are currently available to all employees benefiting under the plan. (For information regarding benefits, rights, and features, and the determination of current availability, see § 1.401(a)(4)-4.)

(7) Any hardship distribution satisfies the safe harbor standards in the regulations under § 401(k).

.19 Provisions applicable to a § 403(b) Pre-approved Plan intended to be a Retirement Income Account

(1) Every § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account must state the intent to be a Retirement Income Account in accordance with § 1.403(b)-9(a)(2)(ii).

(2) The terms of the plan must satisfy the separate accounting, investment performance, and exclusive benefit requirements of § 1.403(b)-9(a)(2)(i).

(3) If the plan provides for benefits in the form of a life annuity, the plan must satisfy the present value and benefit guarantee requirements of § 1.403(b)-9(a)(5), and the present value must be based on reasonable actuarial assumptions that are either set forth in the plan or incorporated by reference into the plan.

(4) The terms of the plan must set forth the nondiscrimination requirements of § 403(b)(12). The plan also must state that the nondiscrimination requirements will be applied to any employee other than an employee of a QCCO or Church.

(5) In the case of multiple employers that are not part of the same controlled group (as determined under § 414(b), (c), (m), or (o)) participating in the plan, each Adopting Employer must identify whether it is a Church, QCCO, non-QCCO, or minister.

SECTION 6. OPINION LETTERS – SCOPE

.01 General limits on Opinion Letters – An Opinion Letter will be issued only to a Provider or Mass Submitter. An Opinion Letter constitutes a determination that the form of a § 403(b) Pre-approved Plan satisfies the § 403(b) Requirements, subject to the requirements and limitations of this revenue procedure. The IRS’s review of a Provider’s or Mass Submitter’s application for an Opinion Letter for a § 403(b) Pre-approved Plan will consider only the terms of the single plan document or the basic plan document and adoption agreement, as applicable. The IRS’s review will not consider, and an Opinion Letter will not express an opinion with respect to, the terms of any Investment Arrangements under the plan of any Adopting Employer or any other documents that may be incorporated by reference into an Adopting Employer’s plan.

.02 Nonapplicability of this revenue procedure to §§ 401, 403(a), or 4975(e)(7) plans and to IRAs (including traditional IRAs, Roth IRAs, SEPs, and SIMPLE IRAs) – An Opinion Letter will not be issued under this revenue procedure for § 401, 403(a), or 4975(e)(7) plans (see Rev. Proc. 2017-41 for administrative procedures for seeking an opinion letter for § 401, 403(a), or 4975(e)(7) plans). In addition, an Opinion Letter will not be issued under this revenue procedure for prototype plans intended to meet the requirements for individual retirement arrangements under § 408. (See the Form 5305 series, which provides model IRA documents that have been pre-approved by the IRS and for which an opinion letter is not needed. See also Rev. Proc. 87-50, 1987-2 C.B. 647, as modified by Rev. Proc. 97-29, 1997-1 C.B. 698; Rev. Proc. 98-59, 1998-2 C.B. 727; and Rev. Proc. 2010-48, 2010-50 I.R.B. 828, for administrative procedures for seeking an opinion letter for individual retirement arrangements under § 408.)

.03 Plans for which an Opinion Letter will not be issued – An Opinion Letter will not be issued for:

(1) a plan under which the § 415 limitations are incorporated by reference;

(2) a plan under which the actual contribution percentage (ACP) test under § 401(m)(2) is incorporated by reference;

(3) a Nonstandardized Plan that provides for hardship distributions under circumstances not described in the safe harbor standards in the regulations under § 401(k), unless the availability of these distributions is subject to nondiscriminatory and objective criteria included in the plan;

(4) a plan that includes blanks or fill-in provisions for the Adopting Employer to complete, unless the provisions have parameters that preclude the Adopting Employer from completing the provisions in a manner that could violate the § 403(b) Requirements;

(5) a TEFRA church defined benefit plan (see § 1.403(b)-10(f)(2)); or

(6) a plan grandfathered under Rev. Rul. 82-102, 1982-1 C.B. 62.

.04 An Opinion Letter does not consider Title I issues – An Opinion Letter does not express an opinion, and may not be relied upon, with respect to whether any plan is subject to the requirements of Title I of ERISA or whether a plan satisfies any of those requirements.

.05 An Opinion Letter does not consider issues related to a plan’s coverage of multiple employers that are not in a single controlled group – For a § 403(b) Pre-approved Plan that is not a Governmental Plan, an Opinion Letter does not express an opinion, and may not be relied upon, with respect to whether the plan meets any requirements that apply due to a plan’s coverage of multiple employers that are not in a single controlled group for purposes of § 414(b), (c), (m), or (o) and the regulations thereunder. For a § 403(b) Pre-approved Plan that is a Governmental Plan, an Opinion Letter does not express an opinion, and may not be relied upon, with respect to whether the plan meets any requirements that apply due to a plan’s coverage of multiple employers that are not aggregated in a single controlled group in a manner consistent with Notice 89-23.

.06 IRS discretion – The IRS may, in its discretion, decline to issue an Opinion Letter for other types of plans or issues not described in this section.

SECTION 7. ELIGIBILITY FOR THE CYCLE SYSTEM

An Eligible Employer may adopt a § 403(b) Pre-approved Plan (including an Interim § 403(b) Pre-approved Plan or an Existing § 403(b) Pre-approved Plan) at any time during a Cycle. Unless otherwise provided by this revenue procedure, upon an Eligible Employer’s adoption of a § 403(b) Pre-approved Plan, the plan becomes eligible for the Cycle system. The preceding sentence applies to an Eligible Employer that adopts a § 403(b) Pre-approved Plan that amends or restates a plan maintained by the Eligible Employer, as long as the form of the plan that is being amended or restated satisfies the § 403(b) Requirements at the time of the adoption of the § 403(b) Pre-approved Plan. In order for a plan to remain a § 403(b) Pre-approved Plan, an Adopting Employer of the plan must adopt, by the end of the Employer Adoption Window for each Cycle, either the newly approved version of the same plan or a newly approved version of a different § 403(b) Pre-approved Plan. An Adopting Employer that fails to adopt a newly approved version of a § 403(b) Pre-approved Plan by the end of any Employer Adoption Window will no longer be treated as maintaining a § 403(b) Pre-approved Plan. See section 9 for the effect of certain plan amendments on a plan’s eligibility for the Cycle system.

SECTION 8. EMPLOYER RELIANCE ON OPINION LETTER

.01 Standardized Plans

(1) An Adopting Employer of a Standardized Plan may rely on the Standardized Plan’s Opinion Letter that the form of the Adopting Employer’s plan satisfies the § 403(b) Requirements, including, if applicable, the requirements of §§ 401(a)(4) and 410(b), if:

(a) the Standardized Plan has a currently valid Opinion Letter;

(b) the Adopting Employer has not amended the Standardized Plan other than to choose options provided under the Standardized Plan or to make amendments that are described in section 9.03 relating to employer amendments that will not affect reliance (see also section 9.05 for when a § 403(b) Pre-approved Plan is treated as individually designed); and

(c) either (i) the only contributions under the plan are elective deferrals, or (ii) the plan provides for contributions other than elective deferrals and all of the employers in the Adopting Employer’s controlled group are Eligible Employers. For this purpose, for a § 403(b) Pre-approved Plan that is not a Governmental Plan, the Adopting Employer’s controlled group is determined under § 414(b), (c), (m), or (o) and the regulations thereunder; for a § 403(b) Pre-approved Plan that is a Governmental Plan, the Adopting Employer’s controlled group is determined in a manner consistent with Notice 89-23. If the plan provides for contributions other than elective deferrals and the Adopting Employer’s controlled group includes any employer that is not an Eligible Employer, the Adopting Employer may rely on the Opinion Letter, except with respect to whether contributions other than elective deferrals under the plan satisfy the requirements of §§ 401(a)(4) and 410(b).

(2) Notwithstanding the other provisions of this section 8, an Opinion Letter issued for a Standardized Plan may not be relied upon with respect to the requirements of § 415 if the Adopting Employer or any of its Related Employers maintains another § 403(b) plan covering any of the same participants as the Standardized Plan, unless the other plan is also a Standardized Plan. (Also see §§ 1.415(c)-1(d) and 1.415(f)-1(f) for special rules applicable to § 403(b) plans.) However, an Adopting Employer of a Standardized Plan that adds language to satisfy the requirements of § 415 due to the required aggregation of plans may obtain reliance with regard to § 415 by applying for a determination letter using Form 5307 (as updated). See section 8.04.

(3) Additionally, the Adopting Employer of a Standardized Plan may not rely on the Opinion Letter for the Standardized Plan with respect to: (a) whether the timing of any amendment to the Adopting Employer’s plan (or series of amendments) satisfies the nondiscrimination requirements of § 1.401(a)(4)-5(a), except with respect to plan amendments granting past service that meet the safe harbor described in § 1.401(a)(4)-5(a)(3) and are not part of a pattern of amendments that significantly discriminates in favor of highly compensated employees, or (b) whether the Adopting Employer’s plan satisfies the effective availability requirement of § 1.401(a)(4)-4(c) with respect to any benefit, right, or feature. An Eligible Employer that adopts a Standardized Plan as an amendment to a plan other than a Standardized Plan may not rely on the Opinion Letter for the Standardized Plan with respect to whether a benefit, right, or feature that is prospectively eliminated satisfies the current availability requirements of § 1.401(a)(4)-4, if applicable.

.02 Nonstandardized Plans – An Adopting Employer of a Nonstandardized Plan may rely on the plan’s Opinion Letter that the form of the Adopting Employer’s plan satisfies the § 403(b) Requirements, provided that the Nonstandardized Plan has a currently valid Opinion Letter, the Adopting Employer’s plan is identical to the Nonstandardized Plan, and the Adopting Employer has not amended the plan other than by choosing options provided under the plan or by making amendments that are described in section 9.03 relating to employer amendments that will not affect reliance.

(1) Except as otherwise provided in this section 8.02, an Adopting Employer of a Nonstandardized Plan may not rely on the plan’s Opinion Letter with respect to the requirements, if applicable, of:

(a) § 401(a)(4), 410(b), or 414(s); or

(b) § 415, if the Adopting Employer or any of its Related Employers maintain another § 403(b) plan covering any of the same participants as the Nonstandardized Plan. (See also §§ 1.415(c)-1(d) and 1.415(f)-1(f) for special rules applicable to § 403(b) plans.) However, an Adopting Employer of a Nonstandardized Plan that adds language to satisfy the requirements of § 415 due to the required aggregation of plans may obtain reliance with regard to § 415 by applying for a determination letter using Form 5307 (as updated). See section 8.04.

(2) An Adopting Employer of a Nonstandardized Plan may rely on the plan’s Opinion Letter with respect to the requirements of § 410(b), if applicable, if all nonexcludable employees benefit under the Adopting Employer’s plan.

(3) Nonstandardized Plans may permit an Adopting Employer to select an allocation formula for contributions other than elective deferrals that satisfies one of the design-based safe harbors in § 1.401(a)(4)-2(b)(2), and to select a safe harbor compensation definition for the formula that satisfies § 1.414(s)-1(c). If the Adopting Employer selects an allocation formula for contributions other than elective deferrals that satisfies one of the design-based safe harbors in § 1.401(a)(4)-2(b)(2), and, if the allocation formula is based on compensation, selects a safe harbor compensation definition that satisfies § 1.414(s)-1(c), then the Adopting Employer may rely on an Opinion Letter with respect to the nondiscriminatory amounts requirement under § 401(a)(4), if applicable. An Adopting Employer of a Nonstandardized Plan that includes § 401(m) matching contributions may rely on the plan’s Opinion Letter with respect to whether the form of the plan satisfies the ACP test of § 401(m)(2) if the Adopting Employer elects to use a safe harbor definition of compensation in the test. An Adopting Employer of a Nonstandardized Plan that meets the safe harbor requirements described in § 401(m)(11) or 401(m)(12) may rely on the plan’s Opinion Letter with respect to whether the form of the Adopting Employer’s plan satisfies the requirements of § 401(m), unless the Adopting Employer’s plan provides for the safe harbor contributions under § 401(m)(11) or 401(m)(12) to be made under another plan.

.03 Other limitations and conditions on reliance – Notwithstanding any provision in this section 8 to the contrary, the following conditions and limitations regarding reliance by an Adopting Employer on an Opinion Letter apply with respect to all § 403(b) Pre-approved Plans:

(1) An Adopting Employer may rely on an Opinion Letter for a § 403(b) Pre-approved Plan that amends or restates a plan of the Adopting Employer only if the form of the plan that is being amended or restated satisfied the § 403(b) Requirements. Accordingly, prior to being amended or restated, the plan must either have timely corrected any Form Defects for which the Remedial Amendment Period is closed or have corrected any plan document failures under the Employee Plans Compliance Resolution System (EPCRS). See Rev. Proc. 2021-30, 2021-31 I.R.B. 172 (or its successor).

(2) An Adopting Employer may not rely on an Opinion Letter if the Adopting Employer’s adoption of a § 403(b) Pre-approved Plan precedes the issuance of an Opinion Letter for the plan. In this case, in order to have reliance, the Adopting Employer would need to re-adopt the § 403(b) Pre-approved Plan after the issuance of the Opinion Letter for the plan.

(3) An Adopting Employer may not rely on an Opinion Letter if the adoption agreement or other elective provisions in the plan are not completed correctly by the Adopting Employer.

(4) An Adopting Employer may not rely on an Opinion Letter if any Investment Arrangement under the plan or any other document that may be incorporated by reference provides that the terms of the Investment Arrangement or other document shall govern in the event of any conflict between the terms of the Investment Arrangement or other document and the terms of the plan.

(5) The issuance of an Opinion Letter does not constitute a determination by the IRS that an Adopting Employer’s plan is a Governmental Plan or that an Adopting Employer is a Church or QCCO.

(6) Pursuant to section 10.10, a Provider’s failure to disclose a material fact, misrepresentation of a material fact, or failure to accurately provide any of the information called for on any form required by this revenue procedure (or in Appendix A, if used) may result in the inability of Adopting Employers to rely on an Opinion Letter (for example, if there is a failure to disclose a material fact, the IRS may revoke the Opinion Letter due to the failure).

(7) Pursuant to section 11.03(2)(c), if a Mass Submitter fails to identify a significant modification, the failure will be considered a material misrepresentation, and an Adopting Employer may not rely on an Opinion Letter issued with respect to the plan for the modification or any other provision of the plan that may be affected by the modification.

.04 Obtaining a determination letter – An Adopting Employer of a Nonstandardized Plan that makes amendments to the plan that are not extensive may obtain reliance that the form of the plan, as amended, satisfies the § 403(b) Requirements by requesting a determination letter using Form 5307 (as updated) under procedures similar to the procedures applicable to § 401(a) pre-approved plans, and may do so regardless of whether a prior determination letter has been issued with respect to the plan. In addition, if an employer adds language to a § 403(b) Pre-approved Plan to satisfy the requirements of § 415 due to the required aggregation of plans, the employer may obtain reliance with regard to § 415 by applying for a determination letter on Form 5307 (as updated). The determination letter application must be filed during the applicable Employer Adoption Window (for example, a determination letter application for a Cycle 2 plan must be filed during the Cycle 2 Employer Adoption Window). The plan submitted for a Form 5307 determination letter will be reviewed based on the Cumulative List applicable to the underlying § 403(b) Pre-approved Plan. Specific eligibility requirements and submission procedures applicable to filing a Form 5307 determination letter application will be provided in a future update of Rev. Proc. 2021-4 (updated annually).

SECTION 9. PLAN AMENDMENTS

.01 Provider plan amendments generally – Providers are required to amend their § 403(b) Pre-approved Plans to ensure that the form of their plans continues to satisfy the § 403(b) Requirements. Providers must make reasonable and diligent efforts, as soon as practicable following the adoption of plan amendments, to ensure that Adopting Employers of the Provider’s plan have actually received and are aware of the plan amendments. The date on which each amendment is adopted by the Provider must be included with the amendment provided to Adopting Employers. Failure to comply with these requirements may result in the loss of eligibility to offer § 403(b) Pre-approved Plans and the revocation of an Opinion Letter that has been issued to the Provider.

.02 Interim amendment requirement – A § 403(b) Pre-approved Plan must be operated in accordance with its written plan document. When there are changes to § 403(b) Requirements that affect the provisions of the written plan document, the adoption of interim amendments generally will be required in accordance with the rules set forth in section 11.04 of Rev. Proc. 2019-39. See section 22 of this revenue procedure regarding the deadline by which interim amendments must be adopted. Failure to make the interim amendments may result in the form of the plan failing to satisfy the § 403(b) Requirements. The Provider must have a procedure to notify an Adopting Employer of amendments and restatements of the plan and to inform the Adopting Employer, when applicable, of the need to timely adopt or amend the plan, including in the case of both initial adoption and restatement of the plan. The Provider must also notify an Adopting Employer that failure to timely adopt the plan or restatement, when required, or failure to take into account plan amendments in the operation of the plan, could result in adverse tax consequences. See section 10.04 of this revenue procedure for additional application submission requirements for interim amendments.

.03 Employer amendments that will not affect reliance – As provided in section 8, an Adopting Employer may continue to rely on an Opinion Letter for a § 403(b) Pre-approved Plan if it makes amendments to the plan that are described in paragraphs (1) through (8) of this section 9.03. See sections 8.01 and 8.02 for the effect of any other amendments on reliance on an Opinion Letter by the Adopting Employer. The following types of amendments will not cause an Adopting Employer to lose reliance on an Opinion Letter:

(1) amendments to the plan to add or change a provision (including choosing among options in the plan) or to specify or change the effective date of a provision, provided the Adopting Employer is permitted to make the modification or amendment under the terms of the § 403(b) Pre-approved Plan, as well as under § 403(b), and, in the case of a Standardized Plan, the provision is identical to a provision in the § 403(b) Pre-approved Plan, except for the effective date;

(2) sample or model amendments published by the IRS that specifically provide that their adoption will not cause a plan to fail to be identical to the § 403(b) Pre-approved Plan;

(3) amendments that adjust the limitations under §§ 415, 402(g), 401(a)(17), and 414(q)(1)(B) to reflect annual cost-of-living increases;

(4) plan language completed by the Adopting Employer if the overriding language is necessary to satisfy § 415 because of the required aggregation of multiple plans under that section, in accordance with section 5.09;

(5) interim amendments or discretionary amendments, as described in sections 11 and 12 of Rev. Proc. 2019-39, that are related to a change in the § 403(b) Requirements for the form of a plan;

(6) amendments that reflect a change of a Provider’s name, in which case the Provider must notify the IRS, in writing, of the change in name and certify that it still meets the conditions to be a Provider described in section 4.21 (see also section 15 regarding changes in employer identification numbers);

(7) amendments to the administrative provisions in the plan (such as provisions relating to investments, plan claims procedures, or the Adopting Employer’s contact information), provided the amended provisions are not in conflict with any other provision of the plan, still meet the requirements of this revenue procedure, and do not cause the plan to fail to satisfy the § 403(b) Requirements (see section 11.03(1)(b)(ii) for additional examples of administrative provisions); and

(8) amendments with respect to which a closing agreement under the Audit Closing Agreement Program or a compliance statement under the Voluntary Correction Program of EPCRS has been issued (see section 6.05(2)(b) of Rev. Proc. 2021-30 regarding the ability of the Adopting Employer to rely on the Opinion Letter).

.04 Effect of employer amendments on a plan’s eligibility for the Cycle system – Except as provided in section 9.05, employer amendments made to the § 403(b) Pre-approved Plan will not affect the plan’s eligibility for the Cycle system. See section 8.04 for situations in which an Adopting Employer may obtain a determination letter using Form 5307 (as updated).

.05 Section 403(b) Pre-approved Plans treated as individually designed – An Adopting Employer’s § 403(b) Pre-approved Plan will be treated as individually designed (and the Adopting Employer may not rely on the plan’s Opinion Letter and will lose eligibility for the Cycle system) under the following circumstances:

(1) An Adopting Employer makes any amendment to a Standardized Plan other than an amendment listed in section 9.03 or as otherwise described in this section 9.05. In this case, the Adopting Employer will lose reliance on the Opinion Letter as of the effective date of the amendment but the plan will remain eligible for the Cycle system (provided that the Adopting Employer adopts timely interim amendments) until the end of the Cycle that includes the effective date.

(2) An Adopting Employer amends a § 403(b) Pre-approved Plan (including its adoption agreement, if applicable) within one year of the date the Adopting Employer initially adopted the § 403(b) Pre-approved Plan to incorporate a type of plan not permitted in the Opinion Letter program, as described in section 6.03. In this case, the Adopting Employer will be treated as never having had any reliance on the Opinion Letter and will be treated as never having been eligible for the Cycle system.

(3) An Adopting Employer amends a § 403(b) Pre-approved Plan (including its adoption agreement, if applicable) more than one year after the date the Adopting Employer initially adopted the § 403(b) Pre-approved Plan to incorporate a type of plan not permitted in the Opinion Letter program, as described in section 6.03. In this case, the Adopting Employer will lose reliance on the Opinion Letter as of the effective date of the amendment but the plan will remain eligible for the Cycle system (provided that the Adopting Employer adopts timely interim amendments) until the end of the Cycle that includes the effective date.

(4) The IRS, in its sole discretion, determines that a Nonstandardized Plan is an individually designed plan due to amendments to the plan that are extensive (that is, the plan of the Adopting Employer as amended is no longer substantially similar to the Nonstandardized Plan of the Provider). In this case, the Adopting Employer generally will lose reliance on the Opinion Letter as of the effective date of the amendments but the plan will remain eligible for the Cycle system (provided that the Adopting Employer adopts timely interim amendments) until the end of the Cycle that includes the effective date.

(5) An Adopting Employer chooses to discontinue participation in a § 403(b) Pre-approved Plan that has been amended by the Provider, without substituting another § 403(b) Pre-approved Plan. In this case, the Adopting Employer will lose reliance on the Opinion Letter as of the date participation in the § 403(b) Pre-approved Plan ends but the plan will remain eligible for the Cycle system (provided that the Adopting Employer adopts timely interim amendments) until the end of the Cycle that includes the date on which participation in the § 403(b) Pre-approved Plan ends.

(6) An Adopting Employer makes an amendment to a § 403(b) Pre-approved Plan that removes any of the required provisions of section 5. In this case, the Adopting Employer will lose reliance on the Opinion Letter as of the effective date of the amendment but the plan will remain eligible for the Cycle system (provided that the Adopting Employer adopts timely interim amendments) until the end of the Cycle that includes the effective date.

.06 Example – Employer X adopts a newly approved Standardized Plan during the Cycle 2 Employer Adoption Window. During the first year of Cycle 3, Employer X makes an amendment described in section 9.05(1), effective as of the first day of the plan year that begins during the first year of Cycle 3. Pursuant to section 9.05(1), beginning on the first day of that plan year, Employer X’s plan is treated as an individually designed plan. Pursuant to section 5.08, the Provider will no longer have the authority to amend the plan on behalf of the Adopting Employer. Provided that Employer X adopts timely interim amendments, Employer X’s plan will remain eligible for the Cycle through the end of Cycle 3. Employer X decides to no longer be an individually designed plan and adopts a Newly Approved § 403(b) Pre-approved Plan during the Cycle 3 Employer Adoption Window. As a result, it will have a § 403(b) Pre-approved Plan and be eligible for the Cycle system. However, if, instead, Employer X decides to continue to be an individually designed plan, then, by the end of Cycle 3, Employer X’s plan must be amended to reflect all changes in § 403(b) Requirements for which the Remedial Amendment Period applicable to individually designed plans will have expired; 8 moreover, after Cycle 3, Employer X’s plan is subject to the Remedial Amendment Period rules for individually designed plans. See EPCRS, Rev. Proc. 2021-30 (or its successor), for correcting a Form Defect after the expiration of the Remedial Amendment Period for the Form Defect.

.07 No Form 5307 Determination Letter for Pre-approved Plans Treated as Individually Designed – If a plan is treated as individually designed as provided in section 9.05 of this revenue procedure, the employer may not file for a determination letter using a Form 5307 (as updated). The IRS anticipates establishing a program that would permit Adopting Employers to apply for a determination letter on Form 5300, Application for Determination for Employee Benefit Plan , under rules and procedures similar to the rules and procedures applicable to § 401(a) pre-approved plans (see section 20.03 of Rev. Proc. 2016-37 and Rev. Proc. 2021-4 (updated annually)).

SECTION 10. OPINION LETTER APPLICATIONS – INSTRUCTIONS TO PROVIDERS AND OTHER RULES FOR APPLICATIONS AND OPINION LETTERS

.01 Issuance of an Opinion Letter – The IRS will, upon the application of a Provider, issue an Opinion Letter as to satisfaction of the form of the Provider’s plan with the § 403(b) Requirements.

.02 Submission of Opinion Letter applications – Rev. Proc. 2019-39 provides that every § 403(b) Pre-approved Plan will have a recurring Cycle. Rev. Proc. 2019-39 also states that a Provider must submit an application for an Opinion Letter during the On-Cycle Submission Period that relates to an applicable Cycle. Cycle 2 began on July 1, 2020. Pursuant to this revenue procedure, the On-Cycle Submission Period for Providers to submit applications for an Opinion Letter for Cycle 2 begins on May 2, 2022, and ends on May 1, 2023. Providers may apply for an Opinion Letter for Cycle 2 after this On-Cycle Submission Period, but these filings generally will be considered “off-cycle.” See section 12 regarding IRS review of off-cycle filings.

.03 Procedure for applying for an Opinion Letter – The Provider must submit the application for an Opinion Letter with respect to its plan. The IRS is developing the application form to be used and will announce when the form becomes available. If the application form is available when the application is being submitted, the Provider should use the application form. If the form is not available when the application is being submitted, the Provider may use Appendix A of this revenue procedure in lieu of the application form. The application must be accompanied by: (1) the applicable required user fee that will be provided for in the successors to Rev. Proc. 2021-4 (updated annually), (2) if an Opinion Letter had been issued for the § 403(b) Pre-approved Plan for the preceding Cycle, a signed certification that all necessary amendments required by the IRS for the form of the Provider’s plan to continue to satisfy the § 403(b) Requirements have been made and communicated to all Adopting Employers, and (3) any attachment or other document that the application form (or Appendix A, if used) indicates is required. All information on the application form (or Appendix A) must be typed. The application must be sent to the address provided in section 20. The application must include a copy of the plan document and any adoption agreement, if applicable. Copies of Investment Arrangements should not be submitted. The IRS will not review for, and the Opinion Letter will not cover, any provisions included in Investment Arrangements. Additionally, the IRS requests that applications be submitted by thumb or flash drive instead of being submitted as paper files, and that the documents be saved in Microsoft Word or Adobe Acrobat PDF format. The IRS strongly encourages Providers to take advantage of this electronic submission format. To pay a fee, a Provider must continue to submit a paper check and a paper Form 8717-A, User Fee for Employee Plan Opinion or Advisory Letter Request .

.04 Additional submission requirements for interim amendments – If the § 403(b) Pre-approved Plan has received an Opinion Letter for the preceding Cycle, in addition to the application described in section 10.03, the Provider must submit a certification that all interim amendments (and initial amendments, as described in section 4.11, if applicable) on the applicable Cumulative List have been made, and a cover letter summarizing how the provisions of the plan are affected by each amendment. The IRS retains the right to request and secure from the Provider in appropriate circumstances copies of all interim amendments (and initial amendments, if applicable) reflected on the applicable Cumulative List that the Provider has adopted on behalf of its Adopting Employers.

.05 Expediting review of substantially identical plans – The IRS reserves the right to review applications in any order that will expedite the processing of Opinion Letter applications, subject to section 12 regarding off-cycle filing. To expedite the review of substantially identical plans that are not Mass Submitter plans, the IRS encourages plan drafters and Providers to include with each Opinion Letter application, if appropriate, a cover letter setting forth the following information:

(1) the name and file folder number (if available) of the plan that, for review purposes, the plan drafter designates as the “lead plan” (including the name and EIN of the Provider);

(2) a list of all plans written by the plan drafter that are substantially identical to the lead plan (including the information described in paragraph (1) of this section 10.05 for each plan);

(3) a description of each location in the plan for which the application is being submitted that is not word-for-word identical to the language of the lead plan, including an explanation of the purpose and effect of each difference; and

(4) a certification made under penalties of perjury by the plan drafter that the information described in paragraph (3) of this section 10.05 is true and complete.

If the Provider or plan drafter is aware that a lead plan or any substantially identical plan has been assigned for review to a specialist, the cover letter also should indicate the name of the specialist, if possible. To the extent feasible, lead plans and substantially identical plans should be submitted together. The IRS will regard the information and certification described in paragraphs (3) and (4) of this section 10.05 as a representation of a material fact for purposes of issuing an Opinion Letter.

.06 Use of same basic plan document by multiple plans; separate applications required for different categories of Adoption Agreement Plans

(1) In general, provided that the provisions of a basic plan document are identical for all plans using that document, separate adoption agreements may be associated with the same basic plan document. Thus, for example, a Governmental Plan, a plan of a Church or QCCO, and a plan of a non-QCCO that use separate adoption agreements may be associated with the same basic plan document. In addition, a single adoption agreement may be drafted to cover multiple types of Eligible Employers.

(2) Section 403(b) Pre-approved Plans that are intended to be Retirement Income Accounts and plans that are not Retirement Income Accounts may not be set forth in the same basic plan document.

(3) Standardized and Nonstandardized Plans may not be set forth in a single adoption agreement.

(4) A separate application form (or Appendix A) must be submitted with respect to each adoption agreement for which an Opinion Letter is applied. A basic plan document and all associated adoption agreements should be submitted simultaneously. Only one copy of the basic plan document should be provided. However, if additional adoption agreements are later submitted with respect to a basic plan document, the Provider must submit a copy of the basic plan document with each submission and include a cover letter identifying the original submission (including the date submitted). In that case, the plan number given to the basic plan document must remain the same as in the prior submission.

.07 Separate applications required for Single Document Plans – A separate plan and application is required for a Single Document Plan. A Single Document Plan may accommodate usage by more than one type of Eligible Employer; however, a Retirement Income Account plan must always be filed as a separate Single Document Plan. Standardized and Nonstandardized Plans may not be combined in one Single Document Plan.

.08 Sample language – The IRS anticipates providing updated LRMs before the On-Cycle Submission Period with respect to a Cycle begins. Although sample language is designed for use in plans that use an adoption agreement format, in order to expedite processing, Providers are encouraged to refer to the sample language as a guide in drafting Single Document Plans. Specifically, to expedite the review of their plans, Providers are encouraged to use LRM language if appropriate and to identify the location of the LRM language in their § 403(b) Pre-approved Plan. The updated LRMs, when available, may be downloaded from the Internet at http://www.irs.gov/Retirement-Plans/Listing-of-Required-Modifications-LRMs .

.09 Material furnished to Adopting Employers – A Provider must furnish each Adopting Employer with a copy of the approved § 403(b) Pre-approved Plan, copies of any subsequent amendments, and the most recently issued Opinion Letter for the plan from the IRS.

.10 Effect of failure to disclose material fact or to accurately provide information – A failure to disclose to the IRS a material fact, a misrepresentation of a material fact in the application, or the failure to accurately provide any of the information called for on any form or Appendix A required by this revenue procedure may result in the inability of Adopting Employers to rely on the Opinion Letter (for example, if there is a failure to disclose a material fact, the IRS may revoke the Opinion Letter due to the failure). See section 8.03(6) regarding limitations on reliance. The Provider may be required by the IRS to immediately notify all Adopting Employers of any of its § 403(b) Pre-approved Plans affected by the failure if the Adopting Employer’s reliance on the Opinion Letter is affected or if the failure could result in adverse tax consequences for the Adopting Employer.

.11 Additional information may be requested – When reviewing the application for an Opinion Letter, the IRS may, in its discretion, require any additional information that it deems necessary, including a demonstration of how the variables (options or alternatives) in the § 403(b) Pre-approved Plan interrelate to satisfy the § 403(b) Requirements. If a letter requesting changes to the § 403(b) Pre-approved Plan is sent to the Provider or an authorized representative, changes responsive to the letter must be received no later than 30 days from the date of the letter, and the response must include either a copy of the plan with the changes highlighted or, if the changes are not numerous, replacement pages. If the changes are not received within 30 days, the application may be considered withdrawn. An extension of the 30-day time limit will be granted only for good cause .

.12 Inadequate submissions – The IRS will return, without further action or refunding the user fee, plans that are not in substantial compliance with the § 403(b) Requirements, or plans that are so deficient that they cannot be reviewed in a reasonable period of time. A plan may be considered not to be in substantial compliance if, for example, it omits language needed to comply with a § 403(b) Requirement or merely incorporates requirements by reference to the applicable Code section. The IRS will not consider a plan with such an omission or cross-reference until after the plan has been revised and resubmitted, and the modified plan will be treated as a new application for approval as of the date it is resubmitted, and therefore will be treated as off-cycle, as set forth in section 10.02, if resubmitted after the On-Cycle Submission Period. No additional user fee will be charged if an inadequate submission is amended to be in substantial compliance and is resubmitted to the IRS within 30 days following the date the Provider is notified of the inadequacy.

.13 Nonidentification of questionable issues may cause delay – If the § 403(b) Pre-approved Plan submitted as part of an Opinion Letter application includes a provision that gives rise to an issue for which contrary published authorities exist, failure to disclose to the IRS and address any significant contrary authorities may result in requests for additional information, which will delay action on the application. See section 10.11.

.14 No Opinion Letter for later plan amendments – The IRS will not issue an Opinion Letter with respect to amendments made between applicable On-Cycle Submission Periods, and the Provider should not submit an application for an Opinion Letter with respect to plan amendments. Instead, the Provider should submit a restated plan, including the amendments, during the next On-Cycle Submission Period.

SECTION 11. ADDITIONAL REQUIREMENTS FOR MASS SUBMITTERS

.01 Opinion Letter issued to Mass Submitters

(1) The IRS will, upon the application by a Mass Submitter, issue an Opinion Letter as to the satisfaction of the form of the Mass Submitter’s plan with the § 403(b) Requirements. See section 10 for the instructions for Opinion Letter applications. In the case of an initial submission of a § 403(b) Pre-approved Plan under this revenue procedure, the Mass Submitter’s application also must be accompanied by applications for an Opinion Letter filed on behalf of the requisite number of Providers that are offering the same plan on a word-for-word basis as provided in section 11.02, unless the Mass Submitter has already satisfied this requirement in connection with a previous application under this revenue procedure involving another § 403(b) Pre-approved Plan. Any plan submitted by a Mass Submitter must include language designating the Mass Submitter as agent for the Provider for purposes of making plan amendments.

(2) After satisfying the requirement as to the number of adopting Providers, the Mass Submitter may submit additional applications on behalf of other Providers that wish to adopt a word-for-word identical plan to the Mass Submitter plan (as an identical adopter) or a plan that includes Minor Modifications to the Mass Submitter plan (as a minor modifier adopter). In addition, the Mass Submitter may then submit applications for an Opinion Letter under this section 11.01 for its other plans, regardless of the number of identical adopters of the other plans.

.02 Reduced procedural requirements for Providers that use Mass Submitter plans – A Provider of a plan of a Mass Submitter must obtain an Opinion Letter. The Mass Submitter must submit on behalf of each Provider a completed application form (or Appendix A) that includes a declaration by the Mass Submitter under penalties of perjury that the Provider will offer a plan that is word-for-word identical to a plan of the Mass Submitter, or a plan that is a Minor Modification of the Mass Submitter’s plan. The application must be typed. If the Provider is offering a word-for-word identical plan (including a Flexible Plan) a copy of the plan need not be submitted. If the Mass Submitter submits a plan with Minor Modifications, it must comply with the requirements of section 11.03(2). The application must be accompanied by the required user fee that will be provided in the successors to Rev. Proc. 2021-4 (updated annually) and a signed certification that all necessary amendments required by the IRS for the form of the Provider’s plan to continue to satisfy the § 403(b) Requirements have been made and communicated to all Adopting Employers. Upon receipt of the application for an Opinion Letter, the IRS will, as soon as administratively feasible, issue an Opinion Letter with respect to the Provider’s plan (provided that an Opinion Letter has been issued with respect to the Mass Submitter’s plan).

.03 Definitions for Mass Submitter plans

(1) Flexible Plan

(a) In general – A “Flexible Plan” is a plan submitted by a Mass Submitter that includes optional provisions, as described in the immediately subsequent paragraph (b) of this section 11.03. Providers that adopt the Flexible Plan may include or delete any optional provision that is designated as an optional provision in the Mass Submitter’s plan, provided the inclusion or deletion of specific optional provisions conforms to the Mass Submitter’s written representation to the IRS concerning the choices available to Providers and the coordination of optional provisions. A Mass Submitter must bracket and identify the optional provisions when submitting the plan to the IRS, and also must provide the IRS a written representation describing the choices available to Providers and the coordination of optional provisions. Thus, the representation must indicate whether a Provider’s plan may include only one of a certain group of optional provisions, may include only a specific combination of provisions, or may exclude the provisions entirely. Similarly, if the inclusion (or deletion) of a specific optional provision in a Provider’s plan will automatically result in the inclusion (or deletion) of any other optional provision, this must be set forth in the Mass Submitter’s representation. A Flexible Plan may include only optional provisions that meet the requirements of section 11.03(1)(b), and must be drafted so that the satisfaction of the § 403(b) Requirements of the form of any Provider’s plan will not be affected by the inclusion or deletion of optional provisions. For example, a Flexible Plan could include as an optional provision a provision permitting participant loans, provided that the provision satisfies the § 403(b) Requirements and the plan is drafted so that the exclusion of the provision does not cause the plan to fail to satisfy the § 403(b) Requirements. A Flexible Plan adopted by a Provider that differs from the Mass Submitter plan only because the Provider has deleted certain optional provisions from its plan in conformance with the Mass Submitter’s representation described in this paragraph will be treated as a word-for-word identical plan to the Mass Submitter plan. The IRS encourages Mass Submitters to limit the number of optional provisions described in section 11.03(1)(b)(i) and (ii) that they provide under a Flexible Plan to six investment provisions and six administrative provisions.

(b) Optional provisions – A Flexible Plan may include optional provisions that comply with the requirements set forth in this paragraph. The optional provisions may be arranged as separate optional articles or sections within a § 403(b) Pre-approved Plan or as separate optional provisions within a single article or section. A Flexible Plan also may include related optional provisions in the adoption agreement. For example, if a plan document for a Mass Submitter Flexible Plan includes an optional provision that would permit loans under a Provider’s plan, the adoption agreement may also include an optional provision that would enable an Adopting Employer to elect whether loans will be available under the plan it adopts. If the Provider does not wish to enable Adopting Employers to make loans available under their plans, the Provider would delete from the Provider’s plan the optional provisions in both the plan document and the adoption agreement. A Provider may include or delete optional provisions of a Mass Submitter plan, but once the Provider has decided to include an optional provision, it must offer that provision to all Adopting Employers. Any optional provision that the IRS determines does not meet the requirements of this section 11.03(1)(b) must be changed to a non-optional provision or deleted from the Mass Submitter’s plan. The following is an exclusive list of the permittable optional provisions that a Flexible Plan may include:

(i) Investment provisions – A Mass Submitter may offer a variety of investment provisions in its plan for Providers to include or delete from their version of the plan. However, the plan as adopted by a Provider must provide a method for investing assets. Investment provisions are those provisions that describe the plan’s methods of investing assets, including provisions such as the availability of loans and self-directed investments.

(ii) Administrative provisions – A Mass Submitter may offer a variety of administrative provisions in its plan for Providers to include or delete from their version of the plan. However, the plan as adopted by a Provider must describe how the plan will be administered. Administrative provisions are those provisions that describe the administration of the plan, including the powers, duties, and responsibilities of a plan’s custodian, administrator, Adopting Employer, and other fiduciaries. Pursuant to section 5.07, every § 403(b) Pre-approved Plan must provide for an appendix to identify the parties responsible for the various administrative functions under the plan. Optional administrative provisions that a Provider may include in or delete from its version of the plan include the resignation or replacement of fiduciaries, the claims procedures under the plan, and the record-keeping requirements. However, procedural provisions that are required for the form of a plan to meet the § 403(b) Requirements are not administrative provisions under this section. For example, an administrative provision does not include a provision regarding the annual notice to participants explaining the aggregation rules for the limitation on annual additions to a plan (if a participant is in control of any employer).

(2) Minor Modifications

(a) A “Minor Modification” is a minor change to an otherwise word-for-word identical § 403(b) Pre-approved Plan of the Mass Submitter that the IRS determines does not require an in-depth IRS technical review. For example, a change that limits the number of participant loans or a change that adds a new choice of plan entry date would be considered a Minor Modification. By contrast, a change by a Provider of a plan meant to be adopted by a public school, as defined in section 5.17(1)(a), to remove any nondiscrimination provisions that do not apply to a public school from a Mass Submitter’s § 403(b) Pre-approved Plan that was designed for a tax-exempt organization would not be considered a Minor Modification. A Minor Modification must be submitted by the Mass Submitter on behalf of the Provider that will adopt the modified plan. Subject to sections 11.05 and 12 and the provisions of this section 11.03, submissions with respect to Minor Modifications will be reviewed on an expedited basis, and an Opinion Letter will be issued to the Provider as soon as possible, which might be after the issuance of Opinion Letters to other Providers (see section 13).

(b) The IRS reserves the right to determine if the changes described in paragraph (a) of this section 11.03(2) are minor (for example, if the changes are not numerous and do not require an in-depth technical review). If it is determined that the changes are not minor, the plan submitted under section 11.03(2)(c) will not be entitled to expedited review and will otherwise be treated as a non-Mass Submitter plan. In the event the plan is treated as a non-Mass Submitter plan, the IRS will notify the Mass Submitter in writing of its determination. Within 30 days following the date the notification is provided, either the Mass Submitter may revise the plan so that the modifications are minor and resubmit the revised plan, or the Provider may submit the application form (or Appendix A) and an additional user fee in an amount equal to the difference between a non-Mass Submitter plan application user fee and a minor modifier adopter application user fee. If, after the 30-day period, neither action has been taken, the IRS may treat the application as having been withdrawn.

(c) The Mass Submitter must initially submit the first page of the application form (or the entire Appendix A) as a placeholder with respect to each Provider that will offer a plan that is a Minor Modification of the Mass Submitter’s plan during the On-Cycle Submission Period. The application form (or Appendix A) must be typed. When the IRS sends a notification to the applicable Mass Submitter with respect to the Mass Submitter’s plan indicating that the IRS has determined that the plan appears to be in full compliance with the applicable § 403(b) Requirements, the Mass Submitter must submit a copy of the Mass Submitter’s plan with the modifications highlighted, as well as a statement indicating the location and effect of each change. The Mass Submitter must certify under penalties of perjury that the plan of the Provider, except for the delineated changes, is word-for-word identical to the plan for which the Mass Submitter will be receiving or has received an Opinion Letter. If a Mass Submitter fails to identify a significant modification, the failure will be considered a material misrepresentation, and an Adopting Employer may not rely on the Opinion Letter that may be issued with respect to the plan for the modification or any other provision of the plan that may be affected by the modification. See section 8.03(7) regarding limitations on reliance. The Mass Submitter must also immediately notify any affected minor modifier adopter, and the minor modifier adopter must notify all Adopting Employers of any of its § 403(b) Pre-approved Plans affected by the failure and the notification must explain the effect on the reliance by Adopting Employers on the Opinion Letter. If a Mass Submitter repeatedly fails to identify the modifications, the IRS may deny permission to that Mass Submitter to submit additional modifications.

.04 Amendments of Mass Submitter plans – If a Mass Submitter amends one of its § 403(b) Pre-approved Plans, the Mass Submitter must provide copies of the amendment to Providers that have adopted the plan. Any Provider that does not wish to make the amendments made by a Mass Submitter may switch to another Mass Submitter or may submit an application for an Opinion Letter on its own behalf during the next applicable On-Cycle Submission Period for § 403(b) Pre-approved Plans. The IRS will not issue an Opinion Letter with respect to amendments made between applicable On-Cycle Submission Periods, and a Mass Submitter should not submit an application for an Opinion Letter with respect to plan amendments. Instead, the Mass Submitter should submit a restated plan, including the amendments, during the next Cycle.

.05 Expeditious processing accorded Mass Submitter plans – Subject to section 12, all Mass Submitter plans, including approved Mass Submitter plans adopted by Providers, will be accorded more expeditious processing than plans submitted by non-Mass Submitters, to the extent administratively feasible.

SECTION 12. OFF-CYCLE FILINGS

.01 Identical adopter – An application for an Opinion Letter for a § 403(b) Pre-approved Plan that is word-for-word identical to a Mass Submitter § 403(b) Pre-approved Plan will not be treated as off-cycle, as defined in section 10.02, merely because it is submitted after the end of the applicable On-Cycle Submission Period for the Cycle. Applications for a plan that is word-for-word identical to a Mass Submitter’s § 403(b) Pre-approved Plan for a Cycle may be submitted until the IRS informs the Mass Submitter that word-for-word identical applications will no longer be accepted, which is expected to be shortly before the issuance of Opinion Letters for the next Cycle.

.02 Other applications – Any other application for an Opinion Letter (including that of a minor modifier adopter of a Mass Submitter plan) that is submitted after the applicable On-Cycle Submission Period for a Cycle is treated as off-cycle, as defined in section 10.02. If an off-cycle application for a Cycle is submitted before the beginning of the Employer Adoption Window for that Cycle, the IRS generally will not review the application until it has reviewed and processed all applications submitted during that Cycle’s On-Cycle Submission Period. However, the IRS may, in its discretion, determine whether the processing of off-cycle filings may be prioritized and accelerated. Off-cycle applications for a Cycle that are submitted during or after that Cycle’s Employer Adoption Window will not be accepted.

SECTION 13. REVIEW OF OPINION LETTER APPLICATIONS; ISSUANCE OF OPINION LETTERS; EMPLOYER ADOPTION WINDOW

.01 Scope of review – The IRS will review the plans that have been submitted during the On-Cycle Submission Period for a Cycle (as well as later identical adopter applications and applications that are off-cycle that the IRS will review in accordance with section 12) taking into account the applicable Cumulative List for the Cycle. The IRS will also consider in its review of any Opinion Letter application all § 403(b) Requirements that are not described in section 13.02(3), and not solely those on the applicable Cumulative List. 9 For example, if a Provider submits an application for a Cycle 2 Opinion Letter for a new plan that did not receive a Cycle 1 Opinion Letter, the IRS will review the plan taking into account the Cumulative List for Cycle 2, as well as the § 403(b) Requirements that were reviewed during Cycle 1.

.02 Cumulative List

(1) For each Cycle, the IRS intends to publish a Cumulative List for § 403(b) Pre-approved Plans shortly before the start of the Cycle’s On-Cycle Submission Period.

(2) The Cumulative List for a Cycle will identify changes in the § 403(b) Requirements that will be taken into account with respect to the plan document submitted to the IRS for the Cycle and that were not taken into account by the IRS in its review during any prior Cycle.

(3) Except as provided in the applicable Cumulative List, the IRS generally will not consider in its review of any Opinion Letter application any:

(a) guidance issued after approximately 90 days (the exact date being stated in the Cumulative List) prior to the date the applicable Cumulative List is issued;

(b) statutes enacted after approximately 90 days (the exact date being stated in the Cumulative List) prior to the date the applicable Cumulative List is issued;

(c) statutes that are first effective in the year in which the On-Cycle Submission Period begins for which there is no guidance identified on the applicable Cumulative List (regardless of when they are enacted); or

(d) § 403(b) Requirements (either statutory or regulatory) that become effective for the plan in a calendar year following the calendar year in which the On-Cycle Submission Period begins, regardless of when the § 403(b) Requirements are enacted or issued (for example, § 403(b) Requirements first effective in 2023, for applications submitted during the On-Cycle Submission Period beginning in 2022).

.03 Timing of issuance of Opinion Letters – The IRS intends to issue Opinion Letters for a Cycle to Mass Submitters and Providers at approximately the same time within the Cycle for all applications submitted during the Cycle’s On-Cycle Submission Period (other than an application for a plan that is a Minor Modification of a Mass Submitter plan). Prior to issuing Opinion Letters for a Cycle, the IRS will send a notification to the applicable Mass Submitter or Provider, if the IRS determines that the plan appears to be in full compliance with the applicable § 403(b) Requirements, based on the submissions and the review as of the date of notification. However, this notification will only indicate that the plan appears to meet the applicable § 403(b) Requirements under review as of the date of the notification. This notification is for the convenience of the applicable Mass Submitter or Provider concerning the status of its application and does not constitute an official Opinion Letter on which the Mass Submitter or Provider may rely. Also see section 8.03(2), which provides that an Adopting Employer will not have reliance if the Adopting Employer’s adoption of a § 403(b) Pre-approved Plan precedes the issuance of an Opinion Letter for the plan. In addition, the IRS reserves the right to require changes after the notification is sent.

.04 Employer Adoption Window – When the review of § 403(b) Pre-approved Plan documents for a specific Cycle is close to being completed, the IRS will announce the Employer Adoption Window with respect to that Cycle, which will be an approximately two-year period during which Adopting Employers may adopt Newly Approved § 403(b) Pre-approved Plans.

SECTION 14. WITHDRAWAL OF APPLICATIONS

.01 Notification and effect – A Provider may withdraw its application for an Opinion Letter at any time prior to the issuance of the letter by notifying the IRS in writing of the withdrawal at the address provided in section 20. The Provider also must notify each Adopting Employer of the withdrawal of the application and the consequences of the withdrawal to the Adopting Employer. As provided in section 7, the plan of such an employer will become an individually designed plan unless the employer adopts a Newly Approved § 403(b) Pre-approved Plan during the Employer Adoption Window for the Cycle for which the application was submitted.

.02 IRS retains information – Even though an application is withdrawn, the IRS will retain all correspondence and documents associated with that application and will not return them to the Provider. If an application is withdrawn, the case may be referred to IRS Employee Plans Examinations.

SECTION 15. NONTRANSFERABILITY OF OPINION LETTER

An Opinion Letter issued to a Provider is not transferable. In the case of a change in entity with respect to a Provider, an Opinion Letter issued to the Provider may not be utilized by the changed entity. In addition, if a different entity assumes sponsorship of a § 403(b) Pre-approved Plan, it must submit an application for a new Opinion Letter under the name of the different entity and meet all the applicable requirements to be a Provider. Such an application may be filed at the time of the assumption of plan sponsorship by the new Provider, and the filing is not limited to the applicable On-Cycle Submission Period. The application will be subject to a reduced user fee as provided in Appendix A of Rev. Proc. 2021-4 (as updated annually). The new Opinion Letter will recognize the change in sponsorship and will not modify the scope of or change the reliance on the original Opinion Letter. The IRS may, in appropriate circumstances, request documentation of the assumption of sponsorship prior to issuing an Opinion Letter to the new entity. Examples of a change in entity include, but are not limited to, the acquisition of a Provider by another entity, the sale or transfer of the stock or assets of the Provider to another entity, and any other circumstance that results in a change in a Provider’s employer identification number.

SECTION 16. NOTIFICATION OF ADOPTING EMPLOYER REGARDING FAILURE OF THE FORM OF THE PLAN TO SATISFY § 403(b) REQUIREMENTS

If a Provider has knowledge that an Adopting Employer’s plan may no longer satisfy the § 403(b) Requirements and the Provider does not submit a request to correct the failure to satisfy the § 403(b) Requirements under EPCRS, the Provider must notify the Adopting Employer that the plan may no longer satisfy the § 403(b) Requirements, advise the Adopting Employer that adverse tax consequences may result from the plan’s failure to satisfy § 403(b), and inform the Adopting Employer about the availability of EPCRS. See Rev. Proc. 2021-30 (or its successor). This section 16 does not impose a requirement on a Provider to monitor compliance of an Adopting Employer’s plan with the § 403(b) Requirements, but it provides that the Provider has a duty to inform the Adopting Employer if the Provider has knowledge that the Adopting Employer’s plan may no longer satisfy those requirements.

SECTION 17. DISCONTINUED PLANS

.01 Notification to the IRS – A Provider must notify the IRS in writing if a § 403(b) Pre-approved Plan is no longer in use by any Adopting Employer or the Provider intends to discontinue the plan. The written notification must be sent to the address provided in section 20 and must refer to the file folder number appearing on the latest Opinion Letter issued.

.02 Notification to employers – A Provider that intends to discontinue sponsorship of a § 403(b) Pre-approved Plan that has one or more Adopting Employers must inform each Adopting Employer of the date on which the Provider will discontinue sponsorship, and that the Adopting Employer’s plan will cease to be a § 403(b) Pre-approved Plan and convert to an individually designed plan on that date. The Provider must also inform each Adopting Employer that, notwithstanding the Provider’s discontinuance of its sponsorship, if the Adopting Employer adopts another § 403(b) Pre-approved Plan, retroactive to the date of the discontinued sponsorship, by the end of the calendar year following the calendar year in which the Provider discontinues sponsorship of the plan, then the Adopting Employer’s plan will be treated as though it had continued to be a § 403(b) Pre-approved Plan, and not converted to an individually designed plan (and the Adopting Employer will not be treated as having adopted the new § 403(b) Pre-approved Plan after the end of an Employer Adoption Window, if applicable).

SECTION 18. REVOCATION OF OPINION LETTER BY THE IRS

An Opinion Letter found to be in error or not in accord with the current procedures of the IRS or the IRS’s current interpretation of applicable law may be revoked. See also sections 4.21, 8.03(6), 9.01, 10.10 and 19.01 of this revenue procedure for other circumstances under which an Opinion Letter may be revoked. Revocation of an Opinion Letter may be applied retroactively. For this purpose, an Opinion Letter will be given the same effect as a determination letter. See section 23 of Rev. Proc. 2021-4 (as updated annually), disregarding references therein to § 7476. Revocation may be effected by a notice to the Provider to which the Opinion Letter was originally issued. The Provider must then notify each Adopting Employer of the revocation as soon as possible. The notification to each Adopting Employer must explain how the revocation affects any reliance an Adopting Employer has on the applicable Opinion Letter and on any determination letter issued.

SECTION 19. RECORD KEEPING REQUIREMENTS

.01 Filing of Opinion Letter application constitutes agreement to comply with record keeping requirements – By submitting an application for an Opinion Letter under this revenue procedure (or by having an application filed on its behalf by a Mass Submitter), a Provider agrees, as provided in section 4.21, to comply with the requirements imposed on the Provider by this revenue procedure, including the record keeping requirements of this section. Failure to comply with the requirements imposed on the Provider by this revenue procedure may result in the loss of eligibility to be a Provider and the revocation of Opinion Letters that have been issued to the Provider.

.02 Maintenance and availability of records of adopting employers – A Provider must maintain, or have maintained on its behalf, for each of its plans, a record of the names, business addresses, and taxpayer identification numbers of all Adopting Employers. However, a Provider need not maintain records with respect to employers that, to the best of the Provider’s knowledge, ceased to maintain its Pre-approved Plan more than three years earlier. Upon written request, a Provider must provide to the IRS a list of Adopting Employers that indicates, to the best of the Provider’s knowledge, which of those employers continue to maintain the plan as a Pre-approved Plan and which of those employers have ceased to maintain its § 403(b) Pre-approved Plan within the preceding three years.

SECTION 20. WHERE TO FILE

.01 Opinion Letters – Applications for an Opinion Letter, including applications filed by Mass Submitters, should be sent to:

Internal Revenue Service Attn: Pre-Approved Plans Coordinator Room 6-403, Group 7521 P.O. Box 2508 Cincinnati, OH 45201-2508

.02 Delivery service – An application shipped by Express Mail or a delivery service should be sent to the attention of the Pre-Approved Plans Coordinator, to:

Internal Revenue Service 550 Main Street Room 6-403, Group 7521 Cincinnati, OH 45202

PART III – REMEDIAL AMENDMENT PERIOD FOR A FORM DEFECT IN A § 403(b) PRE-APPROVED PLAN

Section 21. expiration of remedial amendment period.

Pursuant to section 11.03 of Rev. Proc. 2019-39, this section provides rules for determining the expiration date of the Remedial Amendment Period for a Form Defect first occurring after the expiration of the Initial Remedial Amendment Period (that is, after June 30, 2020) in a § 403(b) Pre-approved Plan. Provided an interim amendment (as described in section 9.02 of this revenue procedure) is made timely, except as otherwise provided by statute, regulations, or other guidance published in the Internal Revenue Bulletin, the Remedial Amendment Period for a Form Defect first occurring after the Initial Remedial Amendment Period, expires at the later of (1) the end of the Cycle that includes the date on which the Remedial Amendment Period would have ended if the plan were an individually designed plan, or (2) the end of the first Cycle in which an application for an Opinion Letter that considers the Form Defect may be submitted. This Remedial Amendment Period applies regardless of whether the Form Defect relates to a new plan or is due to an amendment (without regard to whether that amendment was required to be adopted) provided that the plan or amendment was adopted timely and in good faith with the intent of complying with the § 403(b) Requirements. The IRS will make the final determination in all cases as to whether a new plan or an amendment to an existing plan was adopted with the good faith intention of complying with the § 403(b) Requirements.

SECTION 22. INTERIM AMENDMENT DEADLINE

.01 Section 403(b) plan that is not a Governmental Plan – For a § 403(b) Pre-approved Plan that is not a Governmental Plan, a Provider (or the Adopting Employer, if applicable) is considered to have adopted an interim amendment described in section 9.02 timely if the amendment is adopted by the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan.

.02 Section 403(b) plan that is a Governmental Plan – For a Governmental Plan, a Provider (or the Adopting Employer, if applicable) is considered to have adopted an interim amendment described in section 9.02 timely if the plan amendment is adopted by the later of (1) the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan, or (2) ninety days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the plan amendment becomes effective.

SECTION 23. EXPIRATION OF LIMITED EXTENSION OF INITIAL REMEDIAL AMENDMENT PERIOD FOR CYCLE 1 § 403(b) PRE-APPROVED PLANS; EXTENSION OF DEADLINE FOR INITIAL AMENDMENT

.01 Expiration of the limited extension of the Initial Remedial Amendment Period – Provided that an initial amendment is timely made in accordance with section 13.03 of Rev. Proc. 2019-39, the limited extension of the Initial Remedial Amendment Period, as defined under Rev. Proc. 2019-39, with respect to certain Form Defects first occurring during Cycle 1 will end on the last day of the Cycle in which an application for an Opinion Letter that considers the Form Defect may be submitted.

.02 Extension of deadline for initial amendment – To be considered timely, the date by which the initial amendment described in section 4.11 must be adopted is extended to the later of (1) June 30, 2020, or (2) the end of the second calendar year following the calendar year in which the change in § 403(b) Requirements is effective with respect to the plan.

SECTION 24. OPERATIONAL COMPLIANCE LIST

The Remedial Amendment Period permits a plan to be amended retroactively to comply with a change in § 403(b) Requirements; however, a plan must be operated in compliance with a change in § 403(b) Requirements beginning on the effective date of the change. To assist Eligible Employers in achieving operational compliance, updates to the Operational Compliance List currently maintained on the IRS website include changes in § 403(b) Requirements that are effective during a calendar year. To comply with the § 403(b) Requirements, however, a plan must comply operationally with each relevant § 403(b) Requirement, even if the requirement is not included on an Operational Compliance List.

PART IV – SPECIAL RULE FOR RETIREMENT INCOME ACCOUNT § 403(b) PRE-APPROVED PLANS

Section 25. inclusion of § 414(e)(3)(b) employees.

.01 In general – A Cycle 1 § 403(b) Pre-approved Plan that is intended to be a Retirement Income Account may be amended by a Provider, a Mass Submitter, or an Adopting Employer to permit the participation of an employee described in § 414(e)(3)(B), retroactive to the beginning of Cycle 2, July 1, 2020.

.02 Requirements – As part of the amendment described in section 25.01, the nondiscrimination requirements of § 403(b)(12) must be set forth in the plan. The plan also must state that the nondiscrimination requirements will be applied to any employee other than an employee of a QCCO or Church. The amendment must be made in good faith with the intent of complying with the § 403(b) Requirements. The Adopting Employer will have until the end of the Cycle 2 Employer Adoption Window to adopt a Cycle 2 Newly Approved § 403(b) Pre-approved Plan that permits the participation of an employee described in § 414(e)(3)(B) and that includes the nondiscrimination requirements that apply to any employee other than an employee of a QCCO or Church. In the case of multiple employers that are not part of the same controlled group (as determined under § 414(b), (c), (m), or (o)) participating in the plan, each Adopting Employer must identify whether it is a Church, QCCO, or any other employer (such as a non-QCCO or minister). For example, the adoption agreement, if applicable, should be amended to require that an Adopting Employer identify whether it is a non-QCCO (in which case, its employees participating in the plan would be subject to the nondiscrimination requirements of § 403(b)(12)).

.03 Reliance – The amendment described in section 25.01 will not affect the plan’s status as a § 403(b) Pre-approved Plan or an Adopting Employer’s reliance on the Cycle 1 Opinion Letter for the § 403(b) Pre-approved Plan (except that the Adopting Employer may not rely on the Cycle 1 Opinion Letter with respect to the amendment permitting participation of those employees).

PART V – MISCELLANEOUS

Section 26. effect on other documents.

Rev. Proc. 2013-22 is modified and superseded regarding Opinion Letter applications submitted with respect to a § 403(b) Pre-approved Plan’s second (and subsequent) Cycles. The provisions of Rev. Proc. 2013-22 continue to apply to opinion and advisory letter applications for § 403(b) Pre-approved Plans submitted for Cycle 1. Rev. Proc. 2019-39 is modified.

SECTION 27. EFFECTIVE DATE

.01 In general – This revenue procedure is effective on July 1, 2020, the day Cycle 2 began, and, except as otherwise stated, applies to applications for an Opinion Letter submitted solely with respect to Cycle 2 and subsequent Cycles.

.02 Extended deadline for interim and initial amendments – Sections 22 and 23.02, relating to deadlines for interim and initial amendments, are effective for Form Defects first occurring on or after July 1, 2020, the day Cycle 2 began.

SECTION 28. PUBLIC COMMENTS

The Treasury Department and the IRS invite comments on this revenue procedure. Comments should be submitted in writing and should include a reference to Rev. Proc. 2021-37. Comments may be submitted in one of two ways:

(1) Electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS-2021-0011” in the search field on the regulations.gov homepage to find this revenue procedure and submit comments).

(2) Alternatively, by mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Rev. Proc. 2021-37), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

All commenters are strongly encouraged to submit comments electronically, as access to mail may be limited. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Treasury Department and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket.

SECTION 29. PAPERWORK REDUCTION ACT

The collection of information included in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-0047.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in sections 5.11, 9.01, 9.02, 10.03, 11, and 19. This information is required to enable the Commissioner, Tax Exempt and Government Entities Division of the Internal Revenue Service, to make determinations in connection with compliance with the § 403(b) Requirements. This information will be used to determine whether a plan is entitled to favorable tax treatment. The likely respondents are banks, insurance companies, other financial institutions, law, actuarial, and consulting firms, employee benefit practitioners and Eligible Employers.

The estimated total annual reporting and/or recordkeeping burden is 29,149 hours.

The estimated annual burden per respondent/recordkeeper varies from 1/2 to 2,000 hours, depending on individual circumstances, with an estimated average of 3.56 hours. The estimated number of respondents and/or recordkeepers is 8,188.

The estimated frequency of responses is occasional.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. § 6103.

SECTION 30. DRAFTING INFORMATION

The principal author of this revenue procedure is Patrick Gutierrez of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). For further information regarding this revenue procedure, contact Employee Plans at (513) 975-6319 (not a toll-free number).

APPENDIX A Application for Approval of § 403(b) Pre-approved Plan

Enter amount of user fee submitted: $

Name of applicant:

b. Address:

Person to contact:

b. Email address:

c. Power of attorney attached?

Type of applicant (check one):

_____a. Provider

_____b. Mass Submitter

_____c. Identical adopter of Mass Submitter plan

_____d. Minor modifier adopter of Mass Submitter plan

Form of plan (check one):

_____a. Single Document Plan

_____b. Adoption Agreement Plan

Indicate whether the plan is a (check one):

_____a. Standardized plan

_____b. Nonstandardized plan

a. Section 403(b) Pre-approved Plan basic plan document number or Single Document Plan number (Each of the Provider’s or Mass Submitter’s basic plan documents or Single Document Plans must be assigned a 2-digit number, starting with 01. Enter the number you have assigned to the basic plan document associated with the adoption agreement, or for the Single Document Plan if applicable, for which this application is filed.):

7. b. Section 403(b) Pre-approved Plan adoption agreement number (Each different adoption agreement associated with a single basic plan document must be assigned a 3-digit number, beginning with 001. Enter the number you have assigned to the adoption agreement for which this application is filed.):

If 4.c. or 4.d. is checked, complete the following information for the Mass Submitter’s plan on which this application is based, to the extent the information is available when this application is filed:

a. Name of Mass Submitter:

b. File folder number:

c. Letter serial number:

d. Date of letter:

e. Basic plan document number or Single Document Plan number (if b, c, and d not available):

f. Adoption agreement number, if applicable (if b, c, and d not available)

Investment arrangement(s) permitted under the Provider’s plan:

_____a. Annuity contracts issued by an insurance company

_____b. Custodial accounts

_____c. Retirement income accounts (Note that Retirement Income Account plans must have a separate plan document)

If 9.c. is selected, check all of the following types of employers that may utilize the Retirement Income Account plan:

_____a. Church

_____b. Qualified Church-Controlled Organization

_____c. Non-qualified Church-Controlled Organization

_____d. Minister

Type(s) of contributions permitted under the Provider’s plan:

_____a. Elective deferrals (other than Roth)

_____b. Roth elective deferrals

_____c. After-tax employee contributions

_____d. Matching contributions

_____e. Other nonelective employer contributions

Are the following documents included with the application:

a. Basic plan document or Single Document Plan?

b. Adoption agreement (if the application is for a § 403(b) Pre-approved Plan that uses an adoption agreement)?

If 4.a. is checked, do you expect at least 15 Eligible Employers to adopt one of your § 403(b) plans?

If 4.b. is checked, are applications on behalf of at least 15 unaffiliated Providers who are sponsoring the identical basic plan document or Single Document Plan included with this application?

If the answer to 14 is “no,” enter the number of the basic plan document or Single Document Plan for which the requirement described in 14 is met:

Applicant’s signature under penalties of perjury (required if 4.a. or 4.b., checked):

Under penalties of perjury, I declare that I have examined this application, including accompanying statements, and to the best of my knowledge and belief it is true, correct, and complete.

Provider’s and Mass Submitter’s signatures under penalties of perjury (required if 4.c. or 4.d. checked):

Under penalties of perjury, I declare that the Provider identified in line 2 of this application has adopted a Pre-approved Plan that is identical to the Mass Submitter plan identified in line 8, or is a minor modifier adopter of the Mass Submitter plan identified in line 8.

Provider’s signature:

Mass Submitter’s signature:

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2021–27 through 2021–52 is in Internal Revenue Bulletin 2021–52, dated December 27, 2021.

1 In general, capitalized terms are defined in section 4 of this revenue procedure.

2 The Department of the Treasury and the IRS also anticipate, subject to available resources, establishing a determination letter program for § 403(b) individually designed plans that will be similar to the determination letter program for § 401(a) individually designed plans. See Rev. Proc. 2016-37, 2016-29 I.R.B. 136 (as modified by Rev. Proc. 2017-41, 2017-29 I.R.B. 92, and Rev. Proc. 2020-40, 2020-38 I.R.B. 575), and Rev. Proc. 2021-4, 2021-1 I.R.B. 157 (as updated annually).

3 Unless otherwise specified, references to revenue procedure section numbers refer to sections of this revenue procedure.

4 The written plan document requirement applies to a § 403(b) plan maintained by a Church or a Qualified Church-Controlled Organization only if the plan is a Retirement Income Account plan under § 403(b)(9). Section 1.403(b)-3(b)(3)(iii).

5 For purposes of this revenue procedure, references to Rev. Proc. 2013-22 are to Rev. Proc. 2013-22, as modified by Rev. Proc. 2014-28 and Rev. Proc. 2015-22, and clarified by Rev. Proc. 2017-18.

6 See section 2.20 of this revenue procedure for the extension of the expiration date of March 31, 2020, to June 30, 2020, by Notice 2020-35, 2020-25 I.R.B. 948.

7 For purposes of this revenue procedure, references to Rev. Proc. 2019-39 are to Rev. Proc. 2019-39, as modified by Rev. Proc. 2020-40 and Notice 2020-35.

8 For an individually designed plan, the Remedial Amendment Period for a Form Defect related to a change in § 403(b) Requirements generally ends on the last day of the second calendar year that begins after the issuance of the Required Amendments List in which the change in § 403(b) Requirements appears. Section 2.13. For example, if a change in § 403(b) Requirements occurs in the 1st year of Cycle 3, and is placed on the Required Amendments List in the 2nd year of Cycle 3, then the Remedial Amendment Period for a Form Defect related to that change would expire at the end of the 4th year of Cycle 3.

9 In order to satisfy the § 403(b) Requirements, a plan must comply with all relevant § 403(b) Requirements, not solely those on the applicable Cumulative List, which generally reflects only the most recent changes to the § 403(b) Requirements.

This revenue procedure modifies the interim amendment deadline set forth in section 15.04(1) of Rev. Proc. 2016-37, 2016-29 I.R.B. 136, as modified by Rev. Proc. 2017-41, 2017-29 I.R.B. 92, and Rev. Proc. 2020-40, 2020-38 I.R.B. 575, to provide that an interim amendment made to a pre-approved plan qualified under § 401(a) of the Internal Revenue Code (Code) is adopted timely if the amendment is adopted by the end of the second calendar year after the calendar year in which the change in qualification requirements is effective with respect to the plan. Under this modification, the interim amendment deadline is no longer determined with reference to § 401(b), and, accordingly, an employer’s tax-filing deadline is no longer relevant in determining the date by which an interim amendment must be adopted. As a result of this modification, the interim amendment deadline set forth in section 15.06(1)(a) of Rev. Proc. 2016-37, which is applicable to a governmental plan within the meaning of § 414(d), and which is determined by reference to the interim amendment deadline for a plan that is not a governmental plan, is modified. Also, consistent with this modification, section 15.06(2) of Rev. Proc. 2016-37, which provides a special rule for determining the tax-filing deadline applicable to a tax-exempt employer that is no longer relevant in light of the modified interim amendment deadline, is deleted. These changes to the interim amendment deadline are consistent with the deadline for adopting interim amendments with respect to § 403(b) pre-approved plans, as set forth in Rev. Proc. 2021-37, this Bulletin.

.01 Rev. Proc. 2016-37 sets forth a system of recurring remedial amendment cycles for qualified pre-approved plans, and sets forth plan amendment deadlines for interim and discretionary amendments made to these plans.

.02 Section 15.02 of Rev. Proc. 2016-37 defines an interim amendment as an amendment with respect to a disqualifying provision described in section 5.03 of Rev. Proc. 2016-37 (that is, a disqualifying provision that results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in those requirements that is effective after December 31, 2001, or that is integral to such disqualifying provision).

.03 Section 15.04(1) of Rev. Proc. 2016-37 sets forth the deadline for the timely adoption of an interim amendment to a qualified pre-approved plan. In general, an interim amendment is considered to have been adopted timely if it is adopted by the end of the remedial amendment period described in section 2.07 of Rev. Proc. 2016-37. In the case of a plan maintained by one employer, the remedial amendment period ends on the later of: (1) the due date (including extensions) for filing the income tax return for the employer’s taxable year that includes the date on which the remedial amendment period begins; or (2) the last day of the plan year that includes the date on which the remedial amendment period begins. In the case of a plan maintained by more than one employer, the remedial amendment period ends on the last day of the tenth month following the last day of the plan year in which the remedial amendment period begins. The remedial amendment period begins on the date on which a change in qualification requirements becomes effective with respect to a plan or, in the case of a provision that is integral to a qualification requirement that has been changed, the first day on which the plan is operated in accordance with the provision as amended.

.04 Section 15.06(1)(a) of Rev. Proc. 2016-37 provides that, for a governmental plan within the meaning of § 414(d), the adoption deadline for an interim amendment is: the later of (1) the deadline that would apply under the rules of section 15.04(1), or (2) 90 days after the close of the third regular legislative session of the legislative body with authority to amend the plan that begins on or after the date the amendment becomes effective.

.05 Section 15.06(2) of Rev. Proc. 2016-37 provides that, for a tax-exempt employer, the adoption deadline for an interim amendment set forth in section 15.04(1) and 15.05 applies, as modified by section 15.06(2). For purposes of determining the applicable tax-filing deadline referenced in section 15.04(1), section 15.06(2) provides the rule used to determine the due date (including extensions) for filing the income tax return for the employer’s taxable year.

.06 Rev. Proc. 2017-41 sets forth procedures of the Internal Revenue Service (IRS) for issuing opinion letters regarding the qualification in form of pre-approved plans. Rev. Proc. 2017-41 provides for a single Opinion Letter program that combines and replaces the Master & Prototype (M&P) and Volume Submitter (VS) programs, under which M&P sponsors and VS practitioners, respectively, submitted their plans to the IRS for review.

SECTION 3. MODIFICATION OF REV. PROC. 2016-37

.01 Section 15.04(1) of Rev. Proc. 2016-37 is revised to read as follows:

In the case of an interim amendment, an employer (or an M&P sponsor or VS practitioner, if applicable) is considered to have timely adopted the amendment if the plan amendment is adopted by the end of the second calendar year following the calendar year in which the change in qualification requirements is effective with respect to the plan.

.02 The heading of section 15.06 of Rev. 2016-37 is revised to read as follows:

Special deadlines for governmental employers

.03 The heading of section 15.06(1) of Rev. Proc. 2016-37 is deleted.

.04 Section 15.06(1)(a) of Rev. Proc. 2016-37 is redesignated as section 15.06(1).

.05 Section 15.06(1)(b) of Rev. Proc. 2016-37 is redesignated as section 15.06(2).

.06 Section 15.06(2) of Rev. Proc. 2016-37 is deleted.

SECTION 4. FUTURE MODIFICATION OF REV. PROC. 2016-37

The Department of the Treasury and the IRS intend to revise Rev. Proc. 2016-37 in future guidance to reflect guidance issued after the publication of Rev. Proc. 2016-37, including the merger of the M&P and VS programs as provided in Rev. Proc. 2017-41, and to make additional administrative changes.

SECTION 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2016-37 is modified.

SECTION 6. EFFECTIVE DATE

This revenue procedure applies to disqualifying provisions that are effective with respect to a plan after December 31, 2020.

SECTION 7. DRAFTING INFORMATION

The principal author of this revenue procedure is Angelique Carrington of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). For further information regarding this revenue procedure, contact Employee Plans at (513) 975-6319 (not a toll-free number).

.01 Pursuant to § 147(f), tax-exempt qualified private activity bonds are subject to a public approval requirement. Except for refunding bonds described in § 147(f)(2)(D), a bond issue must be approved by the governmental unit issuing the bonds (or on behalf of which such bonds are issued) and by the governmental unit having jurisdiction over the area in which any facility to be financed by the issue is located. Under § 147(f)(2)(B), an issue will be treated as having been approved by any governmental unit if the issue is approved by the applicable elective representative of the governmental unit after a public hearing following reasonable public notice, or by voter referendum of the governmental unit.

.02 Section 1.147(f)-1(d)(1) of the Income Tax Regulations provides that public hearing means a forum providing a reasonable opportunity for interested individuals to express their views, orally or in writing, on the proposed issue of bonds and the location and nature of the proposed project to be financed. Section 1.147(f)-1(d)(2) provides that the public hearing must be held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit. The location is presumed convenient for residents of the approving governmental unit if the public hearing is located in the approving governmental unit’s capital or seat of government. Further, if more than one governmental unit is required to hold a public hearing, the hearings may be combined as long as the combined hearing affords the residents of all of the participating governmental units a reasonable opportunity to be heard. The location of any combined hearing is presumed convenient for residents of each participating governmental unit if it is no farther than 100 miles from the seat of government of each participating governmental unit beyond whose geographic jurisdiction the hearing is conducted.

.03 In light of the COVID-19 pandemic, state and local governmental units sought alternatives to in-person hearings held to meet the public approval requirement. In response to these concerns, Rev. Proc. 2020-21, effective May 4, 2020, provides temporary guidance regarding the public approval requirement under § 147(f). Rev. Proc. 2020-21 provides that for the period beginning May 4, 2020, and ending on December 31, 2020, hearings held by teleconference that are accessible to the residents of the approving governmental unit by calling a toll-free telephone number will be treated as held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit for purposes of § 1.147(f)-1(d)(2). Rev. Proc. 2020-49 extends that time period until September 30, 2021. The Department of the Treasury and the Internal Revenue Service have received several requests for further extension of the time period. This revenue procedure extends the time period until March 31, 2022.

SECTION 3. EXTENSION OF TIME PERIOD

The period described in section 4.02 of Rev. Proc. 2020-21 is extended. Accordingly, section 4.02 of Rev. Proc. 2020-21 is modified as follows:

.02 Time period. The period described in this section 4.02 is the period beginning on May 4, 2020, and ending on March 31, 2022.

SECTION 4. EFFECT ON OTHER DOCUMENTS

This revenue procedure modifies section 4.02 of Rev. Proc. 2020-21 and modifies and supersedes Rev. Proc. 2020-49.

SECTION 5. DRAFTING INFORMATION

The principal authors of this revenue procedure are Johanna Som de Cerff and David White of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure, contact Ms. Som de Cerff or Mr. White on (202) 317-6980 (not a toll-free number).

This revenue procedure amplifies Rev. Proc. 2021-3, 2021-1 I.R.B. 140, which sets forth areas of the Internal Revenue Code (Code) relating to issues on which the Internal Revenue Service (Service) will not issue letter rulings or determination letters. This revenue procedure announces that the Service will not issue letter rulings on whether certain transactions are self-dealing within the meaning of section 4941(d) of the Code.

In the interest of sound tax administration, the Service answers inquiries from individuals and organizations regarding their status for tax purposes and the tax effects of their acts or transactions. See Rev. Proc. 2021-1, 2021-1 I.R.B. 1. There are, however, areas in which the Service will not issue letter rulings or determination letters. The Service incorporates these no-rule areas annually into the third revenue procedure of the year, currently Rev. Proc. 2021-3. Section 3 of Rev. Proc. 2021-3 sets forth a list of those areas in which rulings or determination letters will not be issued. See Section 2.01 of Rev. Proc. 2021-3.

The Service is currently reviewing its prior ruling position on transactions described in section 3 of this revenue procedure. The Service has determined that it is in the interest of sound tax administration not to issue rulings on such transactions while it reviews their proper tax treatment.

SECTION 3. APPLICATION

The Service will not issue rulings on whether an act of self-dealing occurs when a private foundation (or other entity subject to § 4941) owns or receives an interest in a limited liability company or other entity that owns a promissory note issued by a disqualified person.

Rev. Proc. 2021-3 is amplified.

SECTION 5. EFFECTIVE DATE

This revenue procedure applies to all ruling requests pending in or received by the Service on or after September 3, 2021. Any ruling request pending with the Service on September 3, 2021, requesting a ruling on the issue described in section 3 of this revenue procedure will be closed and the user fee will be returned in full.

SECTION 6. DRAFTING INFORMATION

The principal author of this revenue procedure is Nathanael DeJonge of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations and Employment Taxes). For further information regarding this revenue procedure, contact Mr. DeJonge at (202) 317-4551 (not a toll-free number).

Definition of Terms

Revenue rulings and revenue procedures (hereinafter referred to as “rulings”) that have an effect on previous rulings use the following defined terms to describe the effect:

Amplified describes a situation where no change is being made in a prior published position, but the prior position is being extended to apply to a variation of the fact situation set forth therein. Thus, if an earlier ruling held that a principle applied to A, and the new ruling holds that the same principle also applies to B, the earlier ruling is amplified. (Compare with modified , below).

Clarified is used in those instances where the language in a prior ruling is being made clear because the language has caused, or may cause, some confusion. It is not used where a position in a prior ruling is being changed.

Distinguished describes a situation where a ruling mentions a previously published ruling and points out an essential difference between them.

Modified is used where the substance of a previously published position is being changed. Thus, if a prior ruling held that a principle applied to A but not to B, and the new ruling holds that it applies to both A and B, the prior ruling is modified because it corrects a published position. (Compare with amplified and clarified , above).

Obsoleted describes a previously published ruling that is not considered determinative with respect to future transactions. This term is most commonly used in a ruling that lists previously published rulings that are obsoleted because of changes in laws or regulations. A ruling may also be obsoleted because the substance has been included in regulations subsequently adopted.

Revoked describes situations where the position in the previously published ruling is not correct and the correct position is being stated in a new ruling.

Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded.

Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series.

Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study.

The following abbreviations in current use and formerly used will appear in material published in the Bulletin.

A —Individual.

Acq. —Acquiescence.

B —Individual.

BE —Beneficiary.

B.T.A. —Board of Tax Appeals.

C —Individual.

C.B. —Cumulative Bulletin.

CFR —Code of Federal Regulations.

COOP —Cooperative.

Ct.D. —Court Decision.

CY —County.

D —Decedent.

DC —Dummy Corporation.

Del. Order —Delegation Order.

DISC —Domestic International Sales Corporation.

EE —Employee.

E.O. —Executive Order.

ER —Employer.

ERISA —Employee Retirement Income Security Act.

EX —Executor.

F —Fiduciary.

FC —Foreign Country.

FICA —Federal Insurance Contributions Act.

FISC —Foreign International Sales Company.

FPH —Foreign Personal Holding Company.

F.R. —Federal Register.

FUTA —Federal Unemployment Tax Act.

FX —Foreign corporation.

G.C.M. —Chief Counsel’s Memorandum.

GE —Grantee.

GP —General Partner.

GR —Grantor.

IC —Insurance Company.

I.R.B. —Internal Revenue Bulletin.

LE —Lessee.

LP —Limited Partner.

LR —Lessor.

Nonacq. —Nonacquiescence.

O —Organization.

P —Parent Corporation.

PHC —Personal Holding Company.

PO —Possession of the U.S.

PR —Partner.

PRS —Partnership.

PTE —Prohibited Transaction Exemption.

Pub. L. —Public Law.

REIT —Real Estate Investment Trust.

Rev. Proc. —Revenue Procedure.

Rev. Rul. —Revenue Ruling.

S —Subsidiary.

S.P.R. —Statement of Procedural Rules.

Stat. —Statutes at Large.

T —Target Corporation.

T.C. —Tax Court.

T.D. —Treasury Decision.

TFE —Transferee.

TFR —Transferor.

T.I.R. —Technical Information Release.

TP —Taxpayer.

TT —Trustee.

U.S.C. —United States Code.

X —Corporation.

Y —Corporation.

Z —Corporation.

Numerical Finding List 1

Bulletin 2021–38

Announcements:

Proposed Regulations:

Revenue Procedures:

Revenue Rulings:

Treasury Decisions:

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2020–27 through 2020–52 is in Internal Revenue Bulletin 2020–52, dated December 27, 2020.

Finding List of Current Actions on Previously Published Items 1

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