New 403(b) Regulations Take Effect 1/1/2009
On July 26, 2007, the IRS published final 403(b) regulations providing updated guidance on administrative requirements for these plans. The earliest applicability for these requirements is January 1, 2009, which is just around the corner. Below is a summary of some of the primary areas that these regulations touch. In broad terms, 403(b) plans are now going to have to look a lot more like 401(k) plans and will be held to more stringent administrative requirements.
First, plan documentation. The final regulation take the position that all 401(b) annuity contracts and custodial account constitute a single 403(b) program that is required to have a written plan document that coordinates tax compliance generally and compliance with 403(b) specifically. Some things that have to be coordinated include maximum contribution provisions of Code Section 415(c), maximum employee deferrals under 402(g), loan limits, anti discrimination rules, transfer of assets, hardship withdrawals and allocation of responsibility for compliance with tax rules. So now there must be a plan document and it must encompass the entire operation of the plan.
Second, catch up contributions are now coordinated. The final regulations confirm that plan participants who are eligible for both lifetime and age 50 catch-up contributions in the same tax year must first exhaust the lifetime catch-up before making an age 50 catch-up contribution. Also, Revenue Ruling 90-24 is repealed. Under current law, "90-24 Transfers" are governed by IRS Revenue Ruling 90-24, which permits transfers among 403(b) vendors without sponsor. The new regulations change this approach. Under the new regulations, the sponsors and vendor are required to enter into an agreement prior to allowing any "90-24 Transfers." This new rule does not affect transfers or exchanges among investment funds within a single investment vehicle but would affect transfers among investment providers or different contracts or custodial accounts offered by a single provider. Moreover, the new rule will only affect the "90-24 Transfers" and do not affect distributions upon termination of employment or otherwise.
Third, 403(b) plans may be amended to add a plan termination clause. Also, the IRS underscored the responsibility of the plan sponsor to offer a 403(b) to all employees (with very limited exceptions). There is also clarification of the definition control group for determining when organizations should be considered under common control.
All in all, the biggest concern about these new regulations is that they are going to require significant efforts to comply and they are going to push toward more potential fiduciary concerns over things like documentation, investment options and plan administration. If you have not already done so, now is a good time to start reviewing your 403(b) plans to see what changes you need to make.
We are a small church with one pastor who benefits from a 403(b) plan through an Edwards Jones account. What are we required to do regarding this new plan? Are there any models we can use to state what needs to be stated?
Church plans are required to become compliant in plan years beginning after December 31, 2009. As with other 403(b) plans, you will be required to update or create plan documentation to reflect the mandated changes. It sounds like you may not presently have plan documentation, in which case a plan can be drafted by counsel or possibly purchased through a service provider. Several samples are available on the web, but it is always recommended that they be reviewed by a benefits professional to make sure they properly comply with the law.