To (B) or Not to (B): Is That the Question? Twenty-First Century Schizoid Plans under Section 403(b) of the Internal Revenue Code

By Pratt, David | Albany Law Review, Fall 2009 | Go to article overview

To (B) or Not to (B): Is That the Question? Twenty-First Century Schizoid Plans under Section 403(b) of the Internal Revenue Code


Pratt, David, Albany Law Review


  I. INTRODUCTION

 II. THE EVOLUTION OF SECTION 403(B)
     A. Before the Fall: 1958 Through 1985
     B. The Brave New World: The Tax Reform Act of 1986
     C. Major Changes Enacted During the 1990s
     D. Major Changes Enacted by EGTRRA
     E. The Pension Protection Act of 2006

III. 403(8) PLANS AND 401(K) PLANS
     A. Eligible Employers
     B. Who Is Eligible to Participate?
     C. Compensation
     D. Dollar Limit on Elective Salary Reduction
        Contributions
        1. General Rule
        Thus, the proposed coordination rule appears to
        squarely conflict with the plain meaning of section
        402(g)(7) of the Code. 3. Coordination with Other
        Plans
     E. Funding
     F. Applicability of ERISA
        1. In General
        2. Consequences of ERISA Coverage
           If the plan is subject to ERISA, there are major
           consequences. First, ERISA limits the employee
           eligibility requirements that may be imposed and
           prohibits the cessation or reduction of benefit
           accruals because of age
        3. The Impact of the New 403(b) Regulations
     G. The "Written Plan" Requirement
     H. Special Section 415 Rules for 403(b)Arrangements
     I. Former Employees
     J. Nondiscrimination
        1. Elective Deferrals
        2. Other Contributions
     K. Employer Aggregation and Controlled Group Rules
     L. Distributions
        1. Minimum Distribution Rules
        2. Salary Reduction Contributions
        3. Custodial Accounts
        4. Plan Termination
        5. Other Amounts
     M. Transfers
     N. Defined Benefit Programs
     O. Insurance
     P. Nonforfeitability
     Q. Years of Service
     R. The Anti-Conditioning Rule
     S. Automatic Enrollment
     T. 403(b) Final Regulations: Effective Date and
        Transition Rules
     U. Effect of Failure to Satisfy the Section 403(b)
        Requirements
     V. EPCRS
     W. The Excise Tax

 IV. PROPOSED CHANGES
     A. Eligible Employers
     B. Compensation
     C. The Special 403(b) Catch-Up
     D. Funding
     E. Applicability of ERISA
     F. The Written Plan Requirement
     G. Section 415
     H. Nondiscrimination
     I. Distributions
     J. Transfers
     K. Insurance
     L. Nonforfeitability
     M. The Excise Tax

  V. CONCLUSION

I. INTRODUCTION

In 1996, I published an article in this law review (3) that discussed in detail the rules governing retirement plans described in Section 403(b) of the Internal Revenue Code ("Code"). (4) The year 2008 marked the fiftieth anniversary of the enactment of section 403(b), and so it is an appropriate time to revisit these issues and discuss developments that have occurred since 1996.

Section 403(b) provides a special type of tax-favored retirement arrangement that is available only to three types of employers: (1) organizations that are tax-exempt under Code section 501(c)(3); (2) public educational institutions; and (3) ministers of religion. (5) These arrangements are variously known as "403(b) plans," "403(b) arrangements," and "tax-sheltered annuity arrangements."

Like its younger but better-known cousin, the 401(k) plan, (6) the 403(b) plan has morphed into something very different from what was originally envisaged. From its inception, a 403(b) plan could only be made available by an "eligible employer" but, unlike "qualified plans" (7) subject to the rules of Code section 401(a), 403(b) plans were not viewed as a retirement savings vehicle for employees generally. Rather, section 403(b) was enacted to limit the extent to which highly paid employees of tax-exempt employers could defer income taxation by voluntarily deferring a portion of their compensation. (8)

Prior to 1958, employees of certain tax-exempt organizations could defer all or part of their income from the organization through the use of a tax-sheltered annuity arrangement. …

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