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Many non-profit organizations sponsor §403(b) retirement plans for their employees. In July 2007, the IRS issued final regulations that govern these plans and impose new requirements on their non-profit sponsors. These new requirements are generally effective January 1, 2009. If your organization sponsors a §403(b) plan, you must take certain compliance steps before December 31, 2008.

Highlights

The final §403(b) regulations include the following:

1. A Written Plan Document is Required. The final §403(b) regulations now require all §403(b) plans to have a written plan document that specifies the plan's material provisions, including eligibility, benefits, limitations, investments available under the plan, distributions, hardship withdrawals, loans, and acceptance of rollovers. Your plan may also contain optional provisions that are permitted--but not required--under §403(b), such as hardship withdrawal distributions, loans, plan-to-plan or contract-to-contract transfers, and acceptance of rollovers to the plan.

If your plan has a single vendor, the vendor may be willing to provide a plan document. However, if your plan has two or more vendors, your organization will be required to prepare and adopt a written plan. Subject to a few limited exceptions, you must adopt a written plan by December 31, 2008. The IRS has published a “model” plan document, but it may not be adequate to suit the needs of your organization.

2. Restrictions on Contributions

a. Universal Availability Rule. Except in certain church plans, all employees must be permitted to make pre-tax elective contributions (called “elective deferrals”) to the plan, if able to do so. The following employees may be excluded in determining whether elective deferrals are “universally available:”

• Employees eligible to make elective deferrals under another §403(b) plan, a 401(k) plan or a §457(b) eligible governmental plan that you sponsor.

• Employees who are non-resident aliens with no U.S. source income from the employer.

• Employees who are students performing certain services.

• Employees who normally work fewer than 20 hours per week.

b. Employer Matching and Nonelective Contributions. Employer matching and nonelective contributions are subject to nondiscrimination rules applicable to 401(k)/profit-sharing plans. (Certain church plans are exempt from this requirement.) The requirements include:

• Section 401(a)(4) (relating to nondiscrimination in contributions and benefits)

• Section 401(a)(17) (limiting the amount of compensation that can be taken into account)

• Section 401(m) (relating to matching and after-tax employee contributions)

• Section 410(b) (relating to minimum coverage)

3. In-Service Transfers. In-service transfers (formerly governed by Rev. Rul. 90-24) will continue to be allowed only if there is a written agreement between your organization and the vendor that permits the sharing of employee information so that the eligibility and distribution rules of the plan may be followed.

4. Plan Termination. Before the final §403(b) regulations, there were questions with respect to whether and how a §403(b) plan could terminate. The final regulations now make clear that distributions may be made on account of plan termination, but additional restrictions apply in the case of: (i) a custodial account or (ii) an annuity contract or church retirement account holding elective deferrals. In those cases, distributions on account of termination are permitted only if your organization does not make contributions to another §403(b) plan for 12 months after the distribution. The 12-month rule does not apply if less than 2% of the plan's eligible employees are eligible under the new plan.

5. Timely Deposits of Contributions. Previously, for non-ERISA plans, there was no guidance on the time within which funds were required to be deposited at the provider. Now participant contributions must be transmitted to the funding vehicle “within a period that is not longer than is reasonable for the proper administration of the plan.” As an example, the regulations provide a reasonable plan provision that requires the deposit within 15 business days following the end of the month, during which the amounts would otherwise have been paid to participants.

Action Steps

Because of the significant changes in the new regulations, you should begin considering the effect these regulations will have on your §403(b) plan immediately, if you have not already done so. We suggest you take the following steps:

• Identify the vendors to which you or your employees have made contributions, and obtain copies of the individual contracts and/or custodial agreements from them.

• Contact the vendors to determine what actions they are taking or will take in order to assist in meeting these new requirements.

• Determine whether any vendors should be discontinued.

• Determine whether the design of the plan should be changed in any way.

• Determine how your plan document will be drafted (or amended if a plan document already exists) to comply with the new requirements. Allow sufficient time for the plan or amendments to be prepared, reviewed, and approved in advance of the January 1, 2009, deadline.

For more information, in the Tax Management Portfolios, see Kenty, 388 T.M., Tax-Deferred Annuities -- Section 403(b), and in Tax Practice Series, see ¶5630, Tax-Sheltered Annuities.