The long awaited 403(b) final regulations have finally arrived after much anticipation.  W. Thomas Reeder, Department of Treasury, announced July 23, 2007 at the Western Benefits Pension Conference in San Francisco, CA that the regulations were on their way to the Federal Register.

Background

On November 16, 2004, the Treasury published proposed regulations under IRC § 403(b).  This guidance represented the most comprehensive update to the regulations in over 40 years.  It included clarification on procedural rules including universal availability (eligibility), contribution limitation and aggregation rules, funding requirements, and proposed items such as a written plan document requirement.  Following publication of the 2004 proposed regulations, comments were received and a public hearing was held.  After consideration and a number of changes, the regulations are now in final form.

Plan Document Requirement and Effective Date

The most controversial of the proposed items included the written plan document provision.  The final regulations retain this requirement in both form and operation.  They state that the existence of the plan facilitates the allocation of the plan responsibilities among the employer and the issuer of the contract (investment provider), and any other parties involved in the implementation of the plan.

The proposed regulations required material provisions regarding eligibility, benefits, applicable limitations, the contracts available under the plan, and time and form of benefit distributions.  In response to comments, the final regulations make a number of clarifications.  Most notably, the plan is permitted to allocate to the employer or other party (as designated by the employer), the responsibility for performing functions to administer the plan including compliance.  The IRS and Treasury Department have concluded that it is generally inappropriate to allocate these responsibilities to employees for a number of reasons.  The new regulations set forth provisions that require advance approval by the employer and/or their agent for certain transactions such as loans and hardship withdrawals to eliminate current employee "self-certification" practices.

Additional comments, including those made by the Association of School Business Officials International, encouraged the IRS and Treasury to indicate that future guidance should be expected to provide for model plan provisions that may be used by public school employers to meet the plan document requirement.  The written plan document will be required for plan years beginning after December 31, 2008.

Additional provisions

The proposed regulations addressed all types of transactions including but not limited to contributions, loans, transfers, exchanges, distributions, and eligible rollovers.  The final regulations offered no change in the clarification of how these transactions should operate, only confirmation of proper procedure.

One additional area of controversy was in the exchange arena, i.e. Rev. Rul. 90-24.  The proposed regulations limited exchanges to only contracts held under the same plan, similar to other qualified plans.  Market interpretation of this same ruling has allowed for exchanges to any contract regardless of plan affiliation.  Such an interpretation makes it difficult if not impossible for a plan to comply with the new rules.  Despite this much contested issue, the IRS and Treasury elected in the final regulations to only allow for exchanges with investment providers who have entered into an agreement with the employer to provide compliance information.

What and When

 Although much guidance within the proposed regulations was in the form of clarification, meaning that operations should be done in this form presently; many employers have postponed implementing any of the rules until final issuance.  For those provisions, such as universal availability, transactional review, and contributions limitation; the time is NOW.  Compliance under these provisions is effective today. The written plan document, especially with model plan language coming for public schools, should be developed and implemented? although proceed with caution.  The extension of the effective date does give employers a little breathing room but not for long.  Holding off until 2009 would be too late.  Eligible plan sponsors should begin addressing these issues as a priority.   It is time to act.