New 403(b) Regulations May Raise Compliance Concerns Among Plan Sponsors
In 2004, when legislators proposed provisions for 403(b) retirement plans to replace 40 years of outdated requirements and guidance, most plan sponsors decided to wait for the final regulations to be published before making major changes to their plans. But since the IRS published the final 403(b) regulations in July 2007, plan sponsors have been scrambling to make the necessary plan changes in order to maintain compliance.
A majority of the new provisions, which apply to retirement savings arrangements sponsored by public schools, civil governments and 501(c)(3) tax-exempt (not-for-profit) organizations, are effective January 1, 2009. As a result, many 403(b) plan sponsors need to make significant changes to their plans and how they are managed in order to comply. Failure to comply could result in additional taxable income to participants. In addition, affected employers could be charged with failure to withhold and pay income and FICA taxes. Both instances could carry costly penalties.
The biggest change is the IRS requirement to put the plan in writing by implementing a plan document. The written plan must cover the following material provisions: eligibility, contributions, applicable limitations, contracts available, and the time and form of distributions. The final regulations express the need for one “central document” for a summary of responsibilities among the sponsor, vendor and any other entities (such as TPAs) involved in implementing the plan. As a result, the regulations suggest that a 403(b) plan be operated under a single plan document, even in a multiple-vendor environment.
The final regulations will put an end to the less-stringent employer safe harbor agreements involving nondiscrimination requirements for employer contributions. They will also require a “universal availability” rule that clearly defines an eligible employee as one who works more than 1000 hours in a year. Under this requirement, the employee must be permitted to enter the plan and make contributions the following plan year.
Employers that offer a 403(b) plan are urged to: (1) take a closer look at the aspects of their plan; (2) review all vendor, sponsor and TPA documents for compliance with the new regulations; and (3) consider contacting providers, consultants, or TPAs to help organize the effort to make the 403(b) plan compliant. Once all the information is gathered and organized, the employer should finalize all documents, service agreements and investment changes before the applicable effective date.
For more information on the new regulations, contact our Retirement & Financial Services division at 919-913-0235, or visit the following links:
403(b) Final Regulations Guide
Questions or comments about this article? Email us at comments@hcwbenefits.com.
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January 4, 2008
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