The IRS has at last published regulations under Internal Revenue Code Section 403(b). These are the defined contribution retirement savings plans for employees of tax-exempt charities, public schools and churches. In recent years, 403(b) plans have been designed and administered to look more and more like 401(k) retirement savings plans for taxable entities. This new set of regulations takes a number of significant steps in that direction.
Written Plan Document Required
Although 403(b) plans sponsored by governmental employers and churches are exempt from most ERISA Title I requirements, the final regulations require all tax-qualified 403(b) plans to operate according to a written plan document including certain key terms. In addition to the governmental and church plans, this would include formerly exempt employee deferral-only arrangements. The plan document may incorporate by reference custodial agreements and annuity contracts issued by insurance companies, mutual funds and financial institutions that may by their terms include certain required tax qualification provisions such as minimum required distribution rules, hardship restrictions, etc. To the extent not included in the funding document, the main plan document must include provisions on eligibility, contribution limits, benefits, available funding options, applicability of loan and hardship withdrawal provisions, permissible rollovers and fund transfers, and sources of contributions (salary deferral, employer match and/or nonmatching contributions). The U.S. Department of Labor has issued subsequent guidance clarifying that the adoption of a written plan document will not make an otherwise exempt plan subject to Department of Labor regulation under ERISA. Tax-exempt employers must still be cautious not to become too involved in the plan if the employer wants the plan to remain exempt from ERISA.
Final regulations clarify the application of the “universal availability” rule. According to the regulation, this rule, which applies to the availability of salary deferral contributions, applies to all 403(b) arrangements other than church plans. Excludable employees under salary deferral arrangements include employees who are eligible to make deferrals to another 403(b), 457(b) or 401(k) plan sponsored by the same employer (including a member of the employers’ controlled group), certain nonresident aliens, certain student employees, and certain part-time employees (employees who normally work fewer than 20 hours per week and are expected to work fewer than 1,000 hours during the 12 month plan year), although employers subject to ERISA may not be able to exclude such employees. Plans complying with the universal availability rule are exempt from any additional nondiscrimination testing of employee deferral contributions. Employer matching and employee after-tax contributions are subject to nondiscrimination testing other than those made to governmental and church plans.
Matching contributions and employee after-tax contributions are subject to the same actual contribution percentage (ACP) test under Code Section 401(m) as are applicable to 401(k) plans with such contributions. Employer nonmatching contributions are subject to the general nondiscrimination rules under Code Section 401(a)(4) that apply to Code Section 401(a) qualified defined contribution retirement plans.
Controlled Group Rules
The regulations clarify the controlled employer rules under Code Section 414 for nonstock entities like tax-exempt corporations. Under the regulation, an entity would be considered under common control if it controls or is controlled by 80% or more of another organization’s board of directors or trustees.
Prior to the final regulations there was no published guidance from the Internal Revenue Service as to whether or how a 403(b) arrangement could be terminated by an employer. The final rules allow plans to be terminated, leading to the distribution and/or rollover of all 403(b) funds.
Contract Exchanges and Plan Transfers
The rules permitting exchanges of annuity contracts under former Revenue Ruling 90 24 have been repealed effective September 24, 2007. Plan-to-plan transfers and rollovers will be permitted from existing 403(b) plans after that date. However, vendors for successor funding vehicles must enter into agreements to maintain distribution restrictions in the sending plan. In addition, the rules clarify that tax-exempt employers wishing to adopt an alternative 401(k) plan upon termination of an existing 403(b) arrangement may not merge the assets of the 403(b) into the 401(k). However, employees may electively roll over their 403(b) accounts into the new 401(k) plan.
Prompt Deposit of Employee Deferral Contributions Required
The final Treasury regulations require employers to remit employee deferral contributions to the appropriate funding source (custodian or annuity carrier) as soon as practicable, but not later than the 15th business day of the month following the month the wages are deferred. This mimics the current labor regulations applicable to 401(k) (and 403(b)), sponsors who are subject to Title I of ERISA.
For most 403(b) plan sponsors, the final regulations are effective for tax years beginning after December 31, 2008 (2009 calendar year). Plans maintained pursuant to collective bargaining agreements and certain church plans have later effective dates.
Plan sponsors of 403(b) plans should become familiar with the new requirements during early 2008. Volunteer trustees and boards of directors of nonprofit organizations should inquire of the organization’s managers and consultants regarding actions required to bring the plans into compliance for 2009.