Overview of Final 403b Regulations

1
Overview of Final 403(b) Regulations
Dan Besse, Fidelity Investments January 15, 2007
Please note that this document provides an
overview of portions of the final 403(b)
regulations which were issued by the IRS on July
26, 2007 as well as portions of 403(b) guidance
put forth by the IRS in Rev. Proc. 2007-71 on
Nov. 27, 2007. This document is not intended to
be a complete summary of the 403(b) regulations
or IRS guidance and should not be relied on as
legal advice by any person.
For Plan Sponsors
Not FDIC insured. May lose value. No bank
guarantee
2
Agenda

• 403(b) Regulations and IRS guidance
• IRS Goals
• 90-24 Transfers
• Vendor / Contract Exchanges
• Information Sharing Agreements
• Self-Certification
• Plan Document Requirement

• Plan Terminations
• Timing of Contributions
• Catch-Up Contributions
• Nondiscrimination Requirements
• Legal Disclaimer

3
403(b) Regulations

• Proposed regulations issued in 2004
• Thousands of comments from the public, plan
  sponsors, and vendors
• Final regulations issued July 26, 2007
• Generally applicable January 1, 2009
• Later effective dates for certain governmental,
  church, collectively bargained employee plans
• Earlier reliance is possible
• Additional 403(b) guidance issued in Rev. Proc
  2007-71 on November 27, 2007
• Model plan language for K-12 public schools
• Transitional guidance regarding certain 403(b)
  contracts issued before 2009

4
IRS Goals

• Theme of the regulations
• To diminish the extent to which 403(b)s differ
  from other salary reduction arrangements
• 401(k) plans
• 457(b) governmental plans
• Recent legislation (EGTRRA, PPA) created
  framework for convergence
• Requiring employers to be responsible for tax
  compliance
• Requiring 403(b) vendors to work with employers
  to ensure compliance

5
90-24 Transfers

• 90-24 transfers were grandfathered on
  September 24, 2007
• Now, new rules apply
• Contract and / or vendor exchanges are permitted
  among approved vendors in the same 403(b) plan
• Plan - to - plan transfers are permitted to
  completely different 403(b) plans or to
  governmental defined benefit plans

6
Vendor / Contract Exchanges
Current Vendors Approved Vendors Frozen
Vendors Other 90-24 Vendors
Approved Vendors Only

7
Vendor / Contract Exchanges
Approved Vendors
Frozen Vendors

1

90-24 Vendors

2

8
Information Sharing Agreements (ISAs)

• Agreement to share information necessary to
  ensure compliance for
• Loans
• Hardship distributions
• Distributable events (termination, disability,
  minimum required distributions)
• Recovery of basis
• Define responsibility for compliance of
  monitoring and approving
• Responsibility may be allocated between the
  employer and its recordkeepers, TPAs, and vendors

9
Self-Certification

• Self-certification occurs where the employee is
  the only person reviewing and attesting to the
  legality of the distribution
• Used for loans, hardship distributions, other
  distributions (such as termination of employment)
• The employer (or a third vendor) does not sign
  off on the transaction or review the supporting
  documentation
• The IRS strongly disapproves of
  self-certification
• Lots of fraud found on audit
• Self-interest may lead to dishonesty
• More oversight and controls required

10
Plan Document Requirement

• May be one document or multiple documents
• The IRS recently released model plan language
  that may be used by K-12 public schools
• Allocates responsibility for administrative
  functions and Code Section 403(b) compliance
• Includes material terms and conditions for
• Eligibility
• Benefits
• Applicable limitations
• Investments available under the plan and
  Individual Agreements, and
• Time and form of benefit distributions
• Optional features
• Hardship withdrawal distributions
• Loans
• Special 403(b) catch-up contributions
• Acceptance of rollovers
• Cash-outs of small balance accounts
• Automatic enrollment and 90-day unwind feature

11
Plan Terminations

• 403(b) plans may be amended to allow termination
• Accumulated benefits must be distributed
• A new 403(b) plan is not permitted for 12 months
  following plan termination
• A new 401(k) is permitted at any time (if
  applicable)
• Regulations are applicable in 2009, but may be
  relied upon now

12
Timing of Contributions

• ERISA timing rules effectively extended to cover
  all 403(b) plans
• Contributions withheld from pay must be sent to
  vendors within an administratively reasonable
  period
• IRS model plan language stipulates this period to
  be within 15 business days following end of month
  in which contributions are withheld from pay

13
Catch-Up Contributions

• 403(b) plans can allow two types of catch-up
  contributions
• Age 50 catch-ups
• Lifetime / special 403(b) catch-ups
• No clear guidance on ordering of catch-up
  contributions prior to final regulations
• Final rules mandate that lifetime / special
  403(b) catch-up be used first

14
Catch-Up Contributions

• Ordering rules

Age 50 catch-ups
Lifetime / special 403(b) catch-ups
Salary deferrals
15
Nondiscrimination Requirements

• Nondiscrimination requirements must be satisfied
  in the same manner as 401(a) qualified plans,
  generally
• Different rules apply for certain governmental
  plans
• Elective Deferrals Universal Availability
• Right to participate in 403(b) plan must be
  universally available
• Need effective opportunity to exercise right
• Exemptions for part-time employees and certain
  others

16
Legal
Please note that this document provides an
overview of portions of the final 403(b)
regulations which were issued by the IRS on July
26, 2007 as well as portions of 403(b) guidance
put forth by the IRS in Rev. Proc.2007-71 on Nov.
27, 2007. This document is not intended to be a
complete summary of the 403(b) regulations or IRS
guidance and should not be relied on as legal
advice by any person.
Not NCUA or NCUSIF insured. May lose value. No
credit union guarantee.
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