IRS issues final 403(b) regulations

by Irina Rapoport, CPA

The new regulations apply to all types of 403(b) plans; including ERISA, non-ERISA, governmental, higher education, health care, church and tax-exempt association plans; and compliance is mandatory. The earliest action-driven, compliance deadline is January 1, 2009. However, the IRS has recently announced that the written plan requirement for 403(b) plans has been extended until December 31, 2009. The deadline would have otherwise been December 31, 2008. Employers must nonetheless operate the 403(b) plan in accordance with a reasonable interpretation of the 403(b) regulations during 2009 and retroactively correct any operational failures that occur after January 1, 2009 (under the new regulations) by December 31, 2009.

Several key highlights include:

403(b) Filing and Audit Requirements. Beginning in 2009, sponsors of 403(b) plans, who are subject to ERISA, are required to file a complete Form 5500 with the IRS and DOL. Prior to 2009, some 403(b) plans were exempt from filing a Form 5500, or filed an abbreviated Form 5500. By far the greatest impact of the new regulations will be on 403(b) plans which cover 100 or more employees. Starting with the 2009 plan year, these "large" plans are required to engage a qualified public accountant to conduct an independent audit of the plan.
Written plan document requirement. All 403(b) plans, including salary deferral only plans that aren't 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 having a separate document for each provider. This means that each provider will have to enter into an agreement with the employer to comply with the terms of the employer's plan.
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 the 403(b) 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 that 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 may request.
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.