Final(ly) 403(b) Regulations

by Bill Mayer

The final section 403(b) regulations become effective January 1, 2009. Some major components of the final regulations are the written plan requirement, changes to contract exchange rules and the ability to terminate a 403(b) plan. Although this is not an exclusive list, it is a good start to analyzing the impact of these new regulations.

Written Plan Requirement

Prior to these regulations there was no written plan requirement under IRS rules. Only section 403(b) plans subject to ERISA (usually plans with employer contributions) were required to have a plan document. Now, all section 403(b) plans, including employee- contribution-only plans, will need to be operated pursuant to a written plan document. Existing plans that are subject to ERISA and already have a written plan document may also need to be restated or at least amended to comply with the final regulations.

What exactly does it mean to operate a plan pursuant to a written plan document? The new regulations require that the plan document contain all of the material terms for eligibility, benefits and applicable limitations. The plan must be a written defined contribution plan, which, in both form and operation satisfies the [new regulations]. Treas.Reg. §1.403(b)-3(b). This is not a new concept for ERISA plan sponsors. But those who have not had a written document may be surprised by the new level of required detail.

What is the deadline to adopt a written plan? As it stands now, the deadline to adopt a written plan is January 1, 2009. All 403(b) plans will need to be operating pursuant to a written plan which satifies the final regulations by this date. However, we may see some guidance from the IRS extending the deadline. Stay tuned.

Contract Exchanges

In addition to the written plan requirement, the final regulations have made significant changes to the contract exchange rules. Under the old rules, contracts could be exchanged virtually at will with only the contract creating limitations. All of the free exchanging had no impact on the contracts status as a 403(b) contract.

Although there are some grandfather rules and relief for problem contracts issued prior to the effective date of the new regulations, all of the free exchanging will vanish with the final regulations. The final §403(b) regulations limit exchanges to the following:

  1. 1.  Exchange from one funding vehicle in a given plan to another funding vehicle in the same plan.
  2. 2.  Transfer from one 403(b) plan to another
  3. 3.  Transfer to governmental defined benefit plan for service credits

Moreover, valid exchanges within the plan to another funding vehicle outside of the plan require an agreement between the employer and the issuer of the contract to share information. This required agreement will likely make it more difficult for participants to transfer outside of the investment choices under the plan.

Plan Termination

The previous rules made it difficult or impossible to terminate a 403(b) plan. The final regulations allow a 403(b) plan to be terminated and the accumulated benefits of participants to be distributed. This is welcome news for employers who no longer wish to keep their 403(b) plan. Because the accounts under the 403(b) plan may be rolled into an IRA and often into a qualified plan, terminating the plan will make sense if the 403(b) plan has been replaced by a 401(k) plan in recent years.

Other important changes for ERISA covered 403(b) plans:

The Department of Labor (DOL) has issued reporting and disclosure regulations. Beginning in the 2009 plan year, ERISA 403(b) plans will no longer have the luxury of completing a simplified filing of the Form 5500. The new DOL regulations subject 403(b) plans to the same reporting requirements as other ERISA covered pension plans including the large plan audit requirement. This new reporting rule will require plans to track the value of individual contracts within the plan.

The final 403(b) regulations and the DOL reporting requirements will bring section 403(b) plans more in line with 401(k) plans. Although differences still remain, they are much less significant than before these final regulations. Given the significant changes brought about by these regulations, we expect to see some additional guidance to assist employers with compliance.

BCG to the rescue

Many 403(b) plans are, for the first time, now going to need the services of a competent plan administration service. BCG can provide that service. Feel free to contact us if you're not sure how you may be affected.