Final regulations under Section 403(b) ("Final Regulations") of the Internal Revenue Code are expected to be published on July 26, 2007. Generally effective in 2009, the Final Regulations substantially follow the November 2004 proposed regulations, with some changes in response to public comments.

Section 403(b) provides a tax-favored retirement vehicle for employees of public schools and Code Section 501(c)(3) organizations. The Final Regulations supersede prior regulations dating back to 1964 and reflect 40 years worth of statutory changes and administrative developments. Major provisions of the Final Regulations:

  • Require a written plan document, which may incorporate by reference terms in related documents;
  • Apply the universal availability requirement without regard to previous administrative exceptions for certain groups of employees;
  • Specify circumstances in which tax-exempt entities must or may be aggregated and treated as a single employer;
  • Limit tax-free exchanges of Section 403(b) contracts with a grant of IRS authority to allow tax-free exchanges in additional circumstances; and
  • Permit employers to terminate Section 403(b) plans and distribute benefits to employees.

In response to concerns about the continued availability of an ERISA exemption applicable to certain Section 403(b) plans, in conjunction with the release of the Final Regulations, the Department of Labor will issue a Field Assistance Bulletin addressing the interaction of the ERISA exemption and the requirements of the Final Regulations.

In upcoming weeks, we will provide more detailed information about the Final Regulations, including a checklist to assist employers in bringing their Section 403(b) plans into compliance by January 1, 2009, the effective date of the Final Regulations for calendar year plans.