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Tara Schulstad Sciscoe Ice Miller LLP (317) 236-5888 email@example.com Tara Schulstad Sciscoe Ice Miller LLP (317) 236-5888 firstname.lastname@example.org Jim Kemper Ice Miller LLP (317) 236-2193 email@example.com Jim Kemper Ice Miller LLP (317) 236-2193 firstname.lastname@example.org
FINAL 403(b) REGULATIONS For the first time in 43 years, final regulations have been issued under Code Section 403(b). Mandate from Congress to make 403(b) plans look more like 401(k) and 457(b) plans. The primary purposes of the regulations are to: oOrganize and consolidate the 403(b) guidance and rules issued since 1964 into one document, and oOverride prior outdated guidance. College and university 403(b) programs impacted.
EFFECTIVE DATE General effective date is January 1, 2009. Prior to January 1, 2009, plan sponsors may comply with: oCurrent law, or oFinal regulations, if acted upon in a reasonable and consistent manner. Special effective dates may apply to collectively bargained plans, some church plans, and some governmental plans. Special effective dates apply to certain new requirements, such as transfers.
SUMMARY OF KEY CHANGES Written plan document requirement. Nondiscrimination rules. Transfers and exchanges. Withdrawal restrictions. Plan terminations. Ordering of contribution limits. Funding arrangements. Timely remittance of contributions.
Every 403(b) plan must have a written plan document that contains all the material terms and conditions of the plan by January 1, 2009. oPrivate institutions already required to have written plan document because of ERISA. oVoluntary salary deferral only plans sponsored by private institutions but treated as exempt from ERISA must now be in writing (more later). oA new requirement for public institutions and private institutions sponsoring church plans. PLAN DOCUMENT REQUIREMENT
Only one written plan for the program, even if multiple vendors under the plan. The written plan may consist of: oA single plan document, or oA bundle of materials, such as a summary plan description, annuity contracts, custodial agreements, salary reduction agreements, etc. IRS to issue a revenue procedure containing model plan language for public schools.
PLAN DOCUMENT REQUIREMENT “ Material terms and conditions” that must be contained in the plan document include: oEligibility oEntry Dates oApproved vendors oContribution limits oDistribution rules Any and all optional plan provisions, such as loans, hardship withdrawals, exchanges and QDROs must also be included in the written plan.
PLAN DOCUMENT REQUIREMENT Plan document controls over vendors’ contracts. Institution should review each vendor’s contract under the 403(b) plan to ensure that: oNone of the contracts conflict with written plan, and oAll annuity contracts and/or custodial accounts comply with the requirements in the final regulations. Failure to timely adopt a written plan results in all contracts under all 403(b) plans sponsored by that employer becoming taxable.
PLAN DOCUMENT REQUIREMENT The plan document may allocate administrative and compliance responsibility to a vendor or other third party. oNo compliance responsibility can be allocated to participants. oAny delegation must be set forth in the plan and should be set forth in the vendor agreement. oAlthough responsibility can be delegated, the institution is still ultimately legally responsible for compliance.
SALARY DEFERRAL ONLY 403(b) PLANS Voluntary salary deferral only 403(b) plans often treated as not subject to ERISA under DOL Regulation 2510.3-2(f) safe harbor: oSalary deferral only; oEmployee participation is voluntary; oAll rights under contract enforceable solely by employee; oEmployer’s involvement with plan is limited; and oEmployer receives no more than reasonable consideration to cover its expenses.
SALARY DEFERRAL ONLY 403(b) PLANS DOL issued guidance shortly after final 403(b) regulations issued that provides that compliance with the final 403(b) regulations will not automatically result in a voluntary salary deferral only plan becoming subject to ERISA. oEmployers can undertake functions required by final regulations – e.g. written plan document – without losing exemption, but undertaking responsibility for optional provisions such as loans, hardships, etc. would cause the plan to become ERISA-covered. oCase by case determination.
SALARY DEFERRAL ONLY 403(b) PLANS Evaluate whether maintaining exemption is worth the compliance risk: oDifficult to stay in ERISA exemption while ensuring that the plan complies with the final 403(b) regulations and that the institution is protected. oMany salary deferral plans treated as exempt are not truly exempt due to employer involvement. oMay better protect the institution and ease administration to combine the supplemental 403(b) plan with the primary 403(b) plan.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY 403(b) plans sponsored by both public and private institutions (but not church plans) must satisfy the universal availability rule, which is the nondiscrimination rule applicable to salary deferral contributions. Failure to satisfy the universal availability rule results in all contracts under all 403(b) plans sponsored by that employer becoming taxable.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY Generally, all employees who contribute at least $200 per year must be allowed to make elective deferrals (Roth or pre-tax) and to make changes at least annually. Employees must have an “effective opportunity” to make elective deferrals which means: oEmployees must have the ability to make or change salary deferral elections at least once a year, and oThe plan sponsor must provide notice of this right to employees at least once a year.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY The following groups may be excluded: oEmployees eligible to make elective deferrals to another 403(b), 401(k) or governmental 457(b) plan of the same employer; oNon-resident aliens; oStudent employees who are exempt from FICA; and oEmployees who normally work fewer than 20 hours per week. Under last two exclusions, all employees who fall within exclusion must be prohibited from participating in the plan.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY Normally work less than 20 hours a week is a 1,000 hour per year rule – tracking required. Can exclude employee for the first year of employment if the institution reasonably expects the employee to work fewer than 1,000 hours of service. After first year, can exclude only if the employee worked fewer than 1,000 hours in previous 12 month period. More stringent rule under ERISA already applies to private institutions - can exclude employee from plan only if employee worked fewer than 1,000 hours of service that year.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY Employers have also been able to exclude the following groups of employees under IRS Notice 89-23’s transitional guidance: oEmployees who make a one-time election to participate in a governmental plan instead of the 403(b) plan; oEmployees covered by a collective bargaining agreement; oVisiting professors for up to one year; oEmployees affiliated with a religious order who have taken a vow of poverty. IRS Notice 89-23 is repealed under the final regulations.
NONDISCRIMINATION RULES – UNIVERSAL AVAILABILITY Delayed effective date of January 1, 2010 for institutions sponsoring a 403(b) plan that contains a Notice 89-23 exclusion as of July 26, 2007. Limited relief for institutions who have excluded visiting professors and individuals who have taken a vow of poverty.
NONDISCRIMINATION RULES – EMPLOYER CONTRIBUTIONS Both private and public institutions (but not church plans) are subject to limits on the “compensation” that can be taken into account under a 403(b) plan. oCode Section 401(a)(17) limit is $225,000 for 2007. oHigher limit under OBRA ’93 may apply for certain participants in 403(b) plans sponsored by public institutions. oLimit does not apply to salary deferral contributions.
NONDISCRIMINATION RULES – EMPLOYER CONTRIBUTIONS Additional nondiscrimination rules apply to private institutions: oCoverage tested under Code Section 410(b). oMatching and after-tax contributions tested under Code Section 401(m). oNonelective contributions tested under Code Section 401(a)(4). oNondiscriminatory benefits, rights and features tested under Code Section 401(a)(4). Must use nondiscriminatory definition of compensation in testing.
NONDISCRIMINATION RULES – EMPLOYER CONTRIBUTIONS IRS Notice 89-23 is repealed under final 403(b) regulations. oIRS Notice 89-23 set forth transitional nondiscrimination safe harbors that permitted varying levels of discrimination based on the plan’s level of coverage. oIRS Notice 89-23 also allowed good faith reasonable interpretation of Code nondiscrimination rules. Same nondiscrimination rules that apply to 401(k) plans and 401(a) plans apply effective January 1, 2009. Private institutions relying on a transitional rules or good faith interpretation may need to reexamine plan design.
TRANSFERS Final 403(b) regulations permit the following non-taxable transfers: oContract exchanges between vendors approved under the 403(b) plan; oPlan to plan transfers from a 403(b) plan to a 403(b) plan sponsored by the participant’s former or current employer; and oTransfers to a governmental defined benefit plan to purchase permissive service credit. Specific rules must be satisfied with respect to each type of transfer.
CONTRACT EXCHANGE RULES – TRANSFERS WITHIN THE PLAN Unless prohibited by the employer or the vendor’s contract, participants have had the ability to transfer their accounts from one 403(b) contract to another under Revenue Ruling 90-24 without employer knowledge or approval. 90-24 transfers no longer permitted after September 24, 2007. New contract exchange rules apply January 1, 2009.
CONTRACT EXCHANGE RULES – TRANSFERS WITHIN THE PLAN Between September 24, 2007 and January 1, 2009, any transfer to another 403(b) vendor will cause the receiving contract to become taxable on January 1, 2009 unless: oThe receiving 403(b) vendor and contract are approved as part of the employer’s written plan on January 1, 2009, or oThe receiving 403(b) vendor enters into an “information sharing agreement” with the employer effective by January 1, 2009 – e.g. agree to share information regarding the participant’s employment status, loans, hardship withdrawals, etc.
CONTRACT EXCHANGE RULES – TRANSFERS WITHIN THE PLAN New contract exchange rules effective January 1, 2009 - oWritten plan must permit contract exchanges. Exchanges are not required. oIf exchanges are permitted to a vendor that is not approved under the plan, vendor and employer must enter into an information sharing agreement – brings the vendor into the plan. oIf exchanges are only permitted between vendors approved under the plan, do not need information sharing agreements since by nature of approved status, this information should already be shared.
ONE-TIME IRREVOCABLE ELECTIONS OR MANDATORY CONTRIBUTIONS Salary deferrals made as a condition of employment or pursuant to a one-time irrevocable election made before first becoming eligible to participate in the 403(b) plan: oDo not count against the salary deferral limits under Code Section 402(g). oAre subject to FICA tax under temporary regulations issued by the IRS, set to expire November 15.
ROTH CONTRIBUTIONS 403(b) plans can allow after-tax Roth contributions beginning in 2006, which are treated the same as traditional pre-tax salary deferrals for most purposes. oCode Section 402(g) limits apply to aggregate of pre- tax and Roth contributions. oDistribution restrictions generally the same, but Roth contributions must be held for five years from the date that the first Roth contribution is made to the 403(b) plan in order to be tax-free at distribution.
SALARY DEFERRAL ORDERING First – elective deferrals are treated as satisfying the basic contribution limit ($15,500 for 2007). Second – elective deferrals over the basic limit are treated as a 15 years of service catch-up contribution, if the participant qualifies (up to $3,000, with $15,000 maximum). Third – elective deferrals over the basic limit and 15 years of service catch-up limit, if applicable, are treated as age 50 catch-up contributions if the participant is age 50 or older ($5,000 for 2007).
ACCRUED SICK AND VACATION PAY If the written plan allows, employees may defer accrued sick and vacation pay into a 403(b) plan so long as it is paid: oWithin 2 ½ months of severance from employment, or oBy the end of the calendar year in which severance occurred, whichever is later. Sick and vacation pay deferrals must not exceed the 402(g) and 415(c) limits when combined with all other contributions. No other post-termination elective deferrals permitted.
POST-TERMINATION CONTRIBUTIONS Employer contributions can be made to 403(b) plan through end of year employee terminates employment and next five years up to total contribution limit each year ($45,000 for 2007). oCan only be employer contributions – no indirect or direct employee election is permissible. oCannot continue after former employee’s death. oUnique rule applicable only to 403(b) plans. oPrivate institutions must be careful of nondiscrimination rules.
LOANS AND HARDSHIP WITHDRAWALS The same rules applicable to 401(k) plans apply. Rules require coordination between vendor and institution. For example - oSix month suspension of salary deferrals may be required if hardship distribution taken. oLoans cannot be made if total amount of outstanding plan loans exceed stated limits (defaulted loans count against limits). Participants cannot self-certify that requirements for loans or hardships are met.
DISTRIBUTION RULES Unlike salary deferrals and contributions to custodial accounts, employer contributions to an annuity contract under a 403(b) plan are not subject to any distribution rules. Under final 403(b) regulations, employer contributions to an annuity contract under a 403(b) plan cannot be distributed before: oParticipant’s attainment of a stated age, oA fixed number of years, or oThe occurrence of an event such as severance from employment or disability. Applicable to contracts issued after December 31, 2008.
REMITTANCE OF CONTRIBUTIONS Contributions must be transferred to vendors within a period that is no longer than reasonable for proper plan administration. oExample in regulations of a reasonable period for salary deferrals is within 15 business days following the end of the month in which amounts would have otherwise been paid to participants. oEmployer contributions subject to 415 rules. Private institutions already subject to this rule under ERISA, except that salary deferral contributions must be transferred no later than 15 business days following the month in which amounts would otherwise have been paid to participants.
SEGREGATED ACCOUNTS A 403(b) plan can have a vesting schedule if unvested amounts are held by vendor in separate account. Any excess contributions to a 403(b) plan must be held by vendor in separate account, although excess elective deferrals may be distributed from account by April 15 following year of excess. Failure to maintain separate accounts results in all assets held under participant’s 403(b) contracts becoming taxable.
CONTRACTS / CUSTODIAL AGREEMENTS Annuity contracts and custodial account agreements have long been required to contain certain provisions to comply with 403(b): oAccount is nonforfeitable and nontransferable, oSalary deferral contribution limits, and oDirect rollover provisions. Now must also contain additional provisions: oMinimum distribution requirements, and oLimits on incidental benefits.
CONSEQUENCES OF FAILURES Certain failures impact only the participant’s account/contract, such as a transfer outside the plan after September 24, 2007. Certain failures will adversely impact all accounts/contracts of all participants under the employer’s plan, including: oA written plan failure, oA nondiscrimination failure, or oAn employer eligibility failure.
PLAN TERMINATION No statutory basis for terminating 403(b) plans. As of January 1, 2009, 403(b) plans can be terminated and plan assets can be distributed to and rolled over by participants. oCan terminate a 403(b) plan prior to January 1, 2009 so long as plan satisfies the final 403(b) regulations in operation. oEmployer cannot establish another 403(b) plan within 12 months. oDistribution of annuity contract to participants acceptable. Assets cannot be transferred to a 401(k), 457(b), or 401(a) plan.
CONTROLLED GROUP RULES New controlled group rules for tax-exempt organizations under Code Section 414(c). oNot applicable to public institutions or private institutions sponsoring church plans– can continue to rely on controlled group rules in IRS Notice 89-23. oApply for 403(b) plan purposes, but also have much broader application: Nondiscrimination rules, contribution limits, 15 years of service catch-up, minimum distributions. 401(a) plans, 457(b) plans, health plans.
CONTROLLED GROUP RULES Common control exists between an institution and another organization if at least 80% of the directors/trustees of one organization are either representatives of, or indirectly or directly controlled by, the other organization. oA director is a “representative” of another organization if he/she is a trustee, director, agent or employee of the other organization. oA director is “controlled” by another organization if the other organization has the power to remove the trustee and designate a new trustee.
CONTROLLED GROUP RULES The new rules also permit tax-exempt organizations to permissively aggregate if they have a common purpose. oTwo or more tax-exempt organizations must maintain a 401(a) or 403(b) plan that covers employees of both organizations. oOrganizations must regularly coordinate their day to day exempt activities. Subject to an anti-abuse rule.
CONTROLLED GROUP RULES – UNIVERSAL AVAILABILITY If 403(b) plan covers employees of more than one 501(c)(3) organization, rule applies separately to each 501(c)(3) organization. If 403(b) plan covers employees of more than one state entity, rule applies separately to each entity that is not part of a common payroll. If employer has historically treated geographically distinct unit(s) as separate for employee benefit purposes, may treat each unit as a separate organization if operated independently on a day to day basis.
VENDOR RELATIONSHIPS Institution is legally responsible for its 403(b) plan both in terms of form (written plan document) and operation (administering the plan in accordance with the plan document and applicable law). Institution may contract for and delegate administrative and compliance duties to a vendor or vendors if documented in plan and appropriate contract. Institution must then monitor vendor(s) to ensure continued compliance with the written plan and regulations.
VENDOR RELATIONSHIPS Institution with more than one 403(b) vendor is responsible for compliance at the plan level – e.g. monitoring contribution limits, loans, hardship withdrawals, distributions, etc. Will require maintenance of a database of plan information: oInstitution can gather information and monitor. oInstitution can contract with a vendor to gather information from other vendors and monitor. oInstitution can hire a third party administrator to gather information from all vendors and monitor.
VENDOR RELATIONSHPS Since compliance is a team effort between institution and vendor, it is important to partner with strong, capable vendors. Institution should eliminate any vendor that cannot or will not agree in writing to comply with final 403(b) regulations, accept the delegation of appropriate administrative and compliance responsibilities, abide by the institution’s 403(b) plan document, and indemnify the institution for the vendor’s failures.
COMPLIANCE STRATEGY Right now - oCut-off 90-24 transfers. oEnsure compliance with universal availability rule. In the next six months – oEvaluate your institution’s compliance strategy – e.g. management of plan level functions. oReview nondiscrimination testing. oEvaluate vendors, vendor agreements and contracts to ensure compliance, limit risk and manage administrative responsibility. By January 1, 2009 – oCreate and adopt a written plan document. oRoll-out any changes to 403(b) plan to employees. oAdopt any necessary procedures for compliance.
COMPLIANCE STRATEGY Consider who will be responsible for: oDrafting the plan document. oEvaluating vendors and selecting, if necessary, a gatekeeper or third party administrator. oReviewing all vendor service agreements and contracts. oDrafting information sharing agreements if contract exchanges permitted under the plan. oDrafting/reviewing vendor agreements with the vendor, gatekeeper and/or third party administrator. oPreparing employee communications and/or rolling out program changes to employees.
COMPLIANCE STRATEGY Adopt the plan document. oBoard of Trustees approves and adopts. oDocument is signed and dated. oDocument is maintained in safe, accessible location. Properly delegate responsibility. oEstablish an administrative committee to which the Board delegates administrative functions. oTo vendors through plan and vendor agreements. oTo participants through ERISA Section 404(c).
COMPLIANCE STRATEGY Prudent selection and monitoring of vendors and investment options. oEstablish a procedure for vendor selection and monitoring, including reasonable fees. oCreate an investment committee and adopt an investment policy statement. Compliance review. oPerform a fiduciary self-audit and use IRS voluntary correction program if necessary. oFile for a private letter ruling.