The IRS has recently issued regulations that impose certain documentation requirements on the 403(b) retirement plans of tax-exempt entities. The deadline for plan and other required documentation is generally January 1, 2009.
The purpose of the regulatory changes is to shift many of the funding responsibilities from 403(b) vendors to the tax-exempt entities whose employees participate in 403(b) plans (or tax sheltered annuities). In addition, the changes are designed to make 403(b) plans more closely resemble 401(k) plans which are used by for-profit entities. Under the new requirements, tax-exempt entities whose employees enter into 403(b) contracts must maintain a written plan document that describes such details as eligibility requirements, benefit limitations and the events triggering distributions. In addition, if a tax-exempt employer wants to permit its employees to choose among multiple vendors of 403(b) annuities, each of those vendors must enter into a formal contract with the tax-exempt employer to share participant information, such as loan activity, hardship withdrawals and other distributions.
Many tax-exempt employers with multiple vendors selling their employees 403(b) taxsheltered annuities are reconsidering this structure. Because the new rules require taxexempt entities to enter into information sharing agreements with each vendor, some entities wishing to avoid burdensome administration have elected to terminate all 403(b) arrangements which are not specifically established and maintained by the tax-exempt entity itself. This eliminates the tax-exempt entity's various administrative requirements as to each 403(b) vendor used by its employees. Other tax-exempt entities that wish to offer a 403(b) arrangement for their employees through a variety of vendors may choose instead to consolidate their vendors. This should reduce administrative costs for the employer that may be overpaying for recordkeeping services by having multiple 403(b) vendors.
It is important to take steps immediately to meet the new regulations as the IRS will most likely enforce compliance through increased plan audits. Tax-exempt entities with 403(b) arrangements must get their compliance documents in order before January 1, 2009.