In 2007, the federal government issued comprehensive new rules which more closely regulate the §403(b) tax-deferred annuities of non-profit institutions. The new regulations now require, among other things, that non-profit employers sponsoring §403(b) retirement plans maintain a written plan document.
New IRS Approval Program
Under Announcement 2009-34, the gover-nment is launching a program under which it will allow §403(b) vendors to obtain advance IRS approval of their prototype plan documents. The IRS will also provide a mechanism for individual employers to get approval on their individually designed §403(b) plans. Adopting an IRS-approved document will provide employers greater certainty that their §403(b) program meets standard requirements of the new regulations.
An eligible employer that adopts a standardized §403(b) prototype plan may rely upon the favorable IRS opinion letter issued for that plan (without filing an individual application with the IRS) if the only contributions to the plan are §403(b) deferrals and if all entities related to the employer participate in the plan. An eligible employer that adopts a non-standardized §403(b) prototype document may rely upon the favorable opinion letter issued for that document for meeting the requirements of §403(b) for all issues except the non-discrimination rules. An employer may apply for an individual IRS letter showing that it meets the non-discrimination requirements.
Provisions Required in Every §403(b) Document
The §403(b) plan document must contain a number of items such as:
- conditions for benefit eligibility;
- applicable limitations affecting contributions;
- the investment arrangements available under the plan;
- and how benefit distributions will be made.
The plan must also satisfy the universal availability requirement described below:
- describe the requirements for matching contributions (if matches are permitted);
- and set forth terms governing any hardship distributions, loans, plan-to-plan transfers, rollovers and contract-to-contract exchanges.
In addition, the plan must generally identify who is responsible for performing the various administrative functions under the plan.
Under the new §403(b) requirements, all employees of an organization (with some limited exceptions) must be given the opportunity to make §403(b) deferrals under a salary reduction agreement. The only employees who may be excluded from §403(b) participation are: (a) employees participating in a §457 or 401(k) plan or another §403(b) plan of the organization; (b) nonresident aliens; (c) students; and (d) employees who normally work fewer than 20 hours per week. The IRS will be auditing employers’ compliance with this particular rule.
Action Required in 2009
Before the end of 2009, sponsors of §403(b) plans are required to adopt a written §403(b) plan that satisfies the 2007 regulations. In addition, the plan sponsor must operate the plan in accordance with the new regulations and make its best efforts to retroactively correct any operational failures during 2009 to conform to the new guidance.
Existing plans must generally be updated for the new regulations effective as of the 2009 plan year.
Form 5500 Filing Obligations
If an employer does not make any discretionary determinations in administering a §403(b) arrangement, it is not required to file annually the Form 5500. Activities that will trigger the annual Form 5500 filing requirement include an employer’s authorizing plan-to-plan transfers; processing distributions; making determinations regarding hardship distributions or the requirements of qualified domestic relations orders; determining who is eligible for loans; enforcing loan provisions; or negotiating changes to the terms of vendors’ §403(b) products. Employers that make matching or other contributions to a §403(b) arrangement are required to file Form 5500 annually. The Form 5500 is an information return.
The 2007 regulations usher in a more regulated environment for §403(b) plans reflecting greater federal oversight of the retirement plans of non-profit organizations. Non-profit employers have until the end of this year to meet many of these new requirements, including adopting plan documents that comply with the new regulations. The new IRS document approval program will afford non-profit employers greater certainty that their plan documents comply with applicable law.