In July 2007, the U.S. Treasury Department published the long-awaited final regulations for 403(b) plans, which had been issued in proposed form in 2004.
The detailed guidance found in these regulations—the first 403(b) regulations since 1964—will make it much easier for employers who sponsor 403(b) plans to determine if their plans are operating properly. The new regulations will be effective January 1, 2009, with certain transitional exceptions. Several key highlights include:
Written plan document requirement. All 403(b) plans, including salary deferral only plans not subject to the Employee Retirement Income Security Act, must now be maintained pursuant to a written plan document. The document must contain all material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan and the time and form under which benefit distributions will be made. Some of these terms and conditions may be found in the annuity or custodial agreements and can be incorporated into the plan document by reference. If a plan is funded using multiple investment providers, the IRS expects the employer to have a single plan document rather than a separate document for each provider. Each provider will have to enter into an agreement with the employer to comply with the terms of the employer’s plan. An employer must have its written plan document in place no later than January 1, 2009.
Universal availability requirement. Employers have always been required to offer all employees, with certain limited exceptions, the right to make salary deferral contributions into the 403(b) plan. The IRS has found extensive violations of the universal availability requirement when auditing 403(b) plans, either through employers ignoring the rule entirely or not providing employees with an effective opportunity to enroll. The new regulations narrowed the number of exceptions to the universal availability requirement and established new written notice requirements for informing all eligible employees of their right to make 403(b) salary deferral contributions. The regulations also specifically noted that governmental employers, such as public school districts, are subject to this requirement. Correcting a failure to meet the universal availability requirement is expensive, so all 403(b) sponsors should carefully review their practices in this area.
Plan termination. Under former rules, an employer that wanted to terminate its 403(b) plan could not distribute account balances to participants who were still actively employed. Under the new regulations, employers will be able to terminate a 403(b) plan and distribute account balances to all participants, as long as the employer doesn’t make any contributions to another 403(b) plan within 12 months from the date the distributions were issued. Employees would have the option to roll over their distributions from the terminated 403(b) plan to the employer’s 401(k) plan; however, the employer couldn’t mandate such rollovers.
Transferring or exchanging contracts. Employees will no longer be allowed to transfer money from one 403(b) contract to a contract with a provider who isn’t a provider under the plan—unless the employer consents and the issuer of the new contract agrees to be bound by the terms of the employer’s plan. The provider must agree to supply information about the employee’s account as the employer requests it.
Guidance on controlled groups. The final regulations formalize guidance the IRS had previously given—that a controlled group exists when one tax-exempt organization has the ability to control 80 percent or more of the board of directors of another tax-exempt organization. For plan purposes, those organizations are considered to be a single employer. These new controlled group rules will apply to issues far beyond 403(b) plans. iBi