1. New 403(b) Regulations Pete Gautreau, CPA Partner Danielle Witten, CPA Senior Manager

2. Agenda New 403(b) plan regulations – Why the change? – What’s different? Common mistakes Steps to take now

3. New 403(b) Plan Regulations Written plan document Universal availability Changed transfer rules Timing of contributions Coordinated catch-up rules Plan terminations

4. Why the Change? Diminish extent to which the rules are different from other tax-favored employer- based retirement plans such as – 401(k) – 457(b)

5. Written Plan Document Key Dates – Original deadline was 1/1/09 – IRS Notice 2009-3 extended deadline to 12/31/09 What this means – Written plan document must be adopted and signed by 12/31/09

6. Written Plan Document (cont.) What this means (cont.) – Plan must operate in accordance with a “reasonable interpretation” of 403(b) – Plan document must intend to satisfy the new regulations – Employer must make its “best effort” to retroactively correct operational failures before 12/31/09

7. Written Plan Document (cont.) Essential Elements – Eligibility requirements – Available investments – Dollar Limitations – Basic plan features Benefits Time and form of distributions

8. Written Plan Document (cont.) Optional Elements – Loans – Hardship withdrawals – Elective deferral catch-ups – Transfers – Terminations

9. Written Plan Document (cont.) Other Recommendations – Plans may incorporate other documents into written plan by reference Annuity contracts Custodial agreements

10. Written Plan Document (cont.) Revenue Procedure 2007-71 – Issued 11/27/07 – Effective 12/17/07 – Includes model plan language for public school use – Plan document will meet requirements if use model language or language that is “substantially similar”

11. Loans Rules – Appropriate dollar limits  Lesser of $50,000 or 50% of vested account balance – Amortization not to exceed 5 years (unless used to purchase a principal residence) – Repayments must be made at least quarterly – Fail to meet legal requirements  Deemed distribution  Subject to income taxes

12. Loans (cont.) Before – Direct relationship between participant and investment provider – Participant sent loan repayments directly to investment company After – Payroll deduction, just like a 401(k) – Plan sponsors will be aware of defaulted loans

13. Hardship Distributions Must meet one of the following hardship requirements: – To purchase a principal residence – To prevent eviction from, or foreclosure on, the principal residence – To pay certain medical expenses – To pay certain education expenses Participant must also exhaust all other sources of financing first

14. Hardship Distributions (cont.) Before – Directly from investment company After – Through the plan sponsor – Must enforce 6 month rule No deferrals for 6 months after receiving a hardship distribution

15. Universal Availability All employees must be able to participate May only exclude the following: – Students – Non-resident alien – Employees covered by another similar plan – Employees normally working < 20 hours per week

16. Universal Availability (cont.) The following are not excluded: – Collective bargaining employees – Visiting professors – Employees who have taken a vow of poverty – Employees who make a one-time election to participate in a governmental non-403(b) plan

17. Universal Availability (cont.) Effective opportunity required – Notice of opportunity to participate – Notice of election timing – Opportunity to change at least once per year Universal availability generally applies to – Each common law entity (each 501(c)3 organization) – Each entity not a part of a common payroll (state entities)

18. Transfer Rules/Exchanges Old 90-24 transfers not allowed after September 24, 2007 Tax-free exchanges can be made only to: – Providers you have approved – Plan of another employer Information Sharing Agreement should be in place

19. Transfer Rules/Exchanges (cont.) Information Sharing Agreement (ISA) – An agreement to share information sufficient to ensure compliance with respect to the following: Loans Hardship distributions Distribution events Recovery of basis in the contract

20. Timing of Contributions No absolute deadline from IRS Contributions must be remitted to vendors as soon as administratively possible What does this mean? – Payroll is run – Funds can be segregated

21. Catch-up Rules Special 15-year catch-up rules – Complex requirements – 15 years of full-time service with same employer Age 50 contribution 15-year catch-up must be used first

22. Catch-up Rules (cont.) Example – 2008 regular deferral limit $15,500 – 2008 annual 15-year catch-up (max.) $3,000 – 2008 age 50 contribution $5,000 Maximum potential contribution for employee in 2008 is $23,500

23. Plan Terminations Employers may terminate both active and frozen 403(b) plans Employers may want to consider the following: – Consult legal counsel to evaluate required documentation needs – Establish process for employee distributions and rollovers – Communicate with employees

24. Common Mistakes Failure to: – Follow provisions in plan document – Properly apply universal availability – Limit employee elective deferrals – Timely return excess elective deferrals and earnings – Identify and report defaulted loans – Satisfy hardship distribution requirements

25. IRS Focus in 2009 Existence of written plan document Amendment of existing plan to comply with final regulations Operating in accordance with written plan document Universal availability

26. Steps to Take Now Make sure the plan has a current, written plan document Identify all plan service providers – Legal counsel – Investment companies – Investment committee – Human resources

27. Steps to Take Now (cont.) Establish policies and processes to ensure proper authorization and record keeping of plan transactions: – Investments – Contributions received and related receivables – Benefit payments – Participant data and plan obligations – Administrative expenses

28. Steps to Take Now (cont.) Develop a written investment policy that addresses the following: – The types of investments the plan can make – Appropriate authorizations for investment transactions – How often the investment options should be reviewed

29. Questions?

30. Thank you! e-mail hotline: Abbi Palsma apalsma@vlsllp.com