403(b) Plan Compliance: It’s 2009: Now what? Richard A. Turner Vice President and Deputy General Counsel The Variable Annuity Life Insurance Company (VALIC)

403(b) Plans of Colleges, Universities, and Community Colleges Defined contribution retirement plan Similarities with 401(k) plans: and important differences Public, private, church ERISA and non-ERISA

403(b) plan history Early days: few Code restrictions other than contribution limitations and constructive receipt 1986: new deferral limits, withdrawal restrictions, and age 70 ½ withdrawal restrictions Subsequent legislation: more restrictions 2009: new comprehensive regulations

403(b) regulations General effective date 1/1/09 Some things changed; many didn’t

403(b) regulations New written plan requirement New universal availability rules Permitted investment products: elimination of standalone life insurance contracts –Earlier effective date New rules for transfers and exchanges –Earlier effective date

403(b) regulations Allocations of compliance responsibilities: cannot allocate to participants Hardship withdrawals: formalized link to 401(k) rules Contribution limitations Contribution remittance timing Related regulations: clarified definitions of control in tax exempt world

Written plan Key concept: put it in writing –Little direction on specifics Deadline extended to 12/31/09, subject to additional conditions –General effective date still 1/1/09 –Reasonable interpretation until written plan adopted

Written plan Employers with multiple plans One document vs. collection of documents Contracts and accounts incorporated into plan –Identifying providers and products Opportunity: To review merits of past decisions

Written plan: Important issues Issue: where do I get a plan document? –Counsel –Investment and service providers –IRS model language –Coming soon: IRS prototype program

Written plan: Important issues Issue: Adoption 1/1/09 or earlier: can I make changes? Yes. Issue: Post-1/1/09 adoption; retroactivity Issue: Caution for non-ERISA plans of private tax-exempt employers (other than churches) Issue: Plan termination

Universal Availability Nondiscrimination rule for voluntary employee deferrals to 403(b) plan: “everybody plays” with limited exceptions 1000 hour rule: effectively replaces 20 hr/wk rule

Universal availability Requires annual notice of eligibility Benefit: don’t have to test actual deferral rates Challenge: properly identifying eligible employees and providing notice

Permitted investments: then there were 3 Prior to final regulations, four permitted investments: –Annuities (first one permitted) –Custodial accounts (invested only in mutual funds) –Retirement income accounts (“steeple” churches) –Life insurance

Permitted investments: then there were 3 Effective 9/24/07: no new life policies Annuities, custodial accounts, retirement income accounts: still available

Transfers and exchanges Previously: transfers between 403(b) plans, investment products under a plan, were permissive Final regulations: create new rules –Intra-plan transfers: “exchanges” –Inter-plan transfers: “transfers”

Transfers and exchanges Key concepts: –Not allowed unless permitted by plan(s) –Accumulated benefit carryover –Carryover of Code restrictions –ISA required for exchanges to non-approved providers

Compliance responsibilities Employer can allocate as desired: self, investment provider(s), other third party Focus: avoiding misrepresentation –Confirmation of severance of employment Focus: prevention of “double dip” abuse –Hardships, loans –Multiple providers; active vs. deselected providers

Compliance responsibilities Distinguishing: 59 ½; disability; QDRO Plan-specific restrictions

Hardship withdrawals Follow 401(k) rules: 2 sets –Deemed: includes specified reasons, 6-month deferral suspension –Facts and circumstances Documentation

Contribution limitations Limitations generally: statutory; not altered by regulations Exception: aggregation under Section 415(c) limit –Unique aggregation –Existed before final regulations –Clarified in final regulations: obligations clarified too

Contribution remittance timing Non-ERISA plans: within a reasonable time –Example: 15 th business day of following month –Examples becomes the rule? –Common remitter services: generally not complete until provider receives ERISA plans: ERISA standard if more restrictive

Controlled groups Triggers aggregation for key compliance purposes Prior guidance: more liberal rules, reasonability tests New regulation: 80% control test Facts and circumstances; anti-abuse

Questions?

Important disclosures This information is general in nature and may be subject to change. Neither the presenter nor The Variable Annuity Life Insurance Company or its financial advisors or other representatives give legal or tax advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For legal or tax advice concerning your situation, consult your attorney or professional tax advisor.