Relief From Immediate Compliance with 2009 § 403(b) Written Plan Document Requirement

The IRS issued a notice today, December 11, 2008 providing relief for certain retirement plans that do not have a written plan in place by January 1, 2009. The new guidance is for retirement plans covering employees at public schools, colleges and universities, and other tax exempt organizations. These retirement plans are often referred to as 403(b) plans after the relevant section in the tax code.

What should your plan say?  Model Plan Language

The model plan language provided has been prepared to take into account the general requirement that a § 403(b) plan include all of the material terms and conditions for the benefits offered under the plan.

The model plan language is intended to be used for a basic plan under which contributions are limited to pre-tax elective deferrals only.  If the employer offers Roth deferrals, employer matching contributions, employer nonelective contributions or post-retirement contributions, the model language will require additional and/or revised provisions which may be necessary or appropriate to comply with the regulations and, if applicable, ERISA.

Other model plan provisions which will require adjustment based on the employer's plan design features include:

• Plan eligibility the model plan provides that employees who normally work fewer then 20 hours per week or who are student teachers are not eligible to participate.  This language will need to be revised if all employees are eligible to participate in the 403(b) plan or if other permitted exclusions are applied.
• Automatic enrollment  the model plan includes an optional provision that provides for any new employee to be automatically enrolled in the 403(b) plan at the time of hire with 5% of pay to be contributed to the plan unless the employee elects otherwise.
• Loans the model plan includes an optional provision that allows for participant loans up to the allowable limits and to the extent permitted by individual participant contracts.
• In-Service Distributions from Rollover Accounts - the model plan includes an optional provision that allows for in-service distributions from any amounts held in a rollover account.
• Hardship Withdrawals ? the model plan includes an optional provision allowing for hardship withdrawal payments to the extent permitted by the individual participant contracts and which satisfy 403(b) rules.
• Eligible Rollover Contributions ? the model plan includes an optional provision allowing for eligible rollover contributions to the 403(b) plan to the extent permitted by the individual participant contracts.
• Exchange to Vendors Who Do Not Receive Regular Participant Contributions  ? the model plan includes an optional provision allowing participants to exchange all or a portion of their account balances to vendors who do not regularly receive plan contributions made by participants.

Contracts issued before 2009 as part of the employer's plan.

The revenue procedure offers relief in the case of contracts issued after December 31, 2004 and prior to January 1, 2009 by vendors that do not receive contributions under the plan either due to the vendor being removed from the plan as a vendor receiving contributions or the vendor's only relationship to the plan is that the vendor issued a contract under the plan pursuant to a contract exchange request after September 24, 2007 (as described in Rev. Rul. 90-24).

Under these new rules, the contracts held by these vendors will not fail to satisfy § 403(b) merely because the contract is not part of the written 403(b) plan if the employer makes a reasonable, good faith effort to include the contract as part of the employer's plan.  A good faith effort includes collecting available information concerning those vendors and notifying those vendors of the name and contact information for the person in charge of administering the plan.  (For this purpose, information is not required to be collected for vendors that ceased to receive contributions prior to January 1, 2005.)

Contracts issued before 2009 held by former employees or beneficiaries.

The revenue procedure offers relief in the case of contracts held by a vendor that ceased to receive contributions before January 1, 2009, due to the fact that the vendor has been discontinued from receiving contributions under the plan, the employer ceased to exist or the vendor's only relationship to the plan is that the vendor issued a contract under the plan pursuant to a contract exchange request after September 24, 2007 (as described in Rev. Rul. 90-24).  These contracts continue to be subject to the requirements of § 403(b) and the regulations and they will not be treated as failing to satisfy the requirements if the plan does not include terms relating to them.

If the participant or beneficiary requests a transaction from the contract, the relief only applies if the vendor makes reasonable efforts to determine the participant's status under the plan from the employer prior to processing.  However, if the participant is a former employee of the employer or a beneficiary as of January 1, 2009, the revenue procedure allows the vendor to rely on information from the participant regarding the participant's status as a former employee or beneficiary as of January 1, 2009.

This special rule applies only with respect to contracts issued prior to January 1, 2009.

Conclusion

This additional guidance equips public schools with the necessary tools to meet the written plan requirements under the final regulations.  Generally speaking, most provisions will meet the needs of employers both in form and operation.  It is advised that attention be made to current operational processes for the plan so that only provisions that apply to the 403(b) plan's operation are adopted.  Qualified administration and legal advice is recommended before any plan is formally adopted.

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.