The Aftermath of the New 403(b) Regulations: Your Questions Answered regarding the Newest Retirement Regulations

Article excerpt


IN LATE JULY 2007, THE INTERNAL Revenue Service dropped a bombshell in the form of new 403(b) regulations, which present great challenges for public school districts and community colleges. The challenge for employees participating in 403(b) plans is the new environment created by the requirement that 403(b) programs in existence since 1961 suddenly are required to be part of one plan.

Because the final regulations and the subsequent revenue procedure were put into place well before certain other necessary guidance was available (such as a plan document prototype program, and correction procedures specially focused on the changes in the final regulations), various organizations filed comment letters with the IRS (among them were the Association of School Business Officials International) requesting an extension of the general effective date of the final regulations.

Updated Rules

Unfortunately, the IRS responded with Notice 2009-3 on December 11, 2008, which we might describe as "too little" and "too late." In that notice, the IRS notes:

1. An employer can wait until December 31, 2009, to actually adopt the written plan IF

2. During 2009, the employer conforms and operates the 403(b) plan under a "reasonable interpretation" of the final regulations AND

3. The employer uses the principles of the Employee Plans Compliance Resolution System revenue procedure (the current version is outlined in Revenue Procedure 2008-50) to correct any operational failures occurring in 2009.

Thus, the simple adoption of the written plan is likely the easiest of the employer's new responsibilities to meet. All of the other requirements of the final regulations apply as of the original effective date, and failure to adopt and conform to the terms of a written plan as of January 1, 2009, as originally required could create some real headaches for employers. For example, screening and eliminating the insurance companies and mutual fund companies that cannot or won't cooperate with the employer's new compliance responsibility should have taken place before January 1, 2009. Any employee making contributions on and after January 1, 2009, to an insurance or mutual fund company that is not subsequently included in the written plan risks "loss of the exclusion"--meaning the account is not a 403(b) account and is subject to disqualification.

Also, failure to conform to the terms of the plan is potentially a disqualification "failure." Thus, if the written plan has not yet been adopted, there could be some real difficulties conforming to terms that may or may not be in place.

The regulations make it difficult in many cases to comply, because there were millions of individually owned 403(b) accounts in existence prior to the general effective date of the final regulations (January 1, 2009, for most employers). The real challenge lies in identifying accounts that may have been accumulated through one's current employer with issuers that have not had "payroll slots" in recent years--and/or accounts that may have been properly transferred to issuers that never held a payroll slot with the employer. In other words, there was no possible way for the employer to identify all of the accounts that may have been "informally" attached to the employer's plan.

Some employers have made hasty decisions since the new rules were implemented. Even more unfortunate, some of those decisions were based on advice from consultants who did not know that public education employers are exempt from any requirements under Title I of the Employment Retirement Income Security Act (ERISA). Additionally, some employers have noted they have terminated their 403(b) plans; however, they may not have complied with the requirements in doing so. Employers will want to be aware of these issues following implementation.

Here are answers to some important questions you might have. …