NEWS FOR NONPROFITS

New 403(b) nonprofit retirement plan rules, by the numbers

On Jan. 28, HANO held a brown-bag session at our offices for members who have 403(b) retirement plans to hear from experts how the rules for these plans have aready changed and what's in store for the future. Jim Ward from Mutual of America's New York office and Lee Robinson of the Honolulu office discussed changes required by the recently finalized 403(b) regulations, which they have summarized below:

1.  What are the major changes imposed by the new regulations?
  • Requirement for a written plan document for all 403(b) arrangements, and for employers to monitor compliance in operation.
  • Universal availability of employee contributions clarified; certain previously excludable classes of employees no longer excludable
  • Annual notice of opportunity to contribute (or change amounts) to eligible employees and participants
  • Rules on catch-up contributions
  • Rules requiring timely remittance of participant contributions
  • Termination of 403(b) Plans
  • Rules on transfers between 403(b) plans
2.  Why did the Internal Revenue Service issue the final regulations at this time?

There have been no significant changes to the 403(b) regulations since they were first adopted in 1964.  The IRS issued the new regulations in an attempt to reflect numerous legislative changes that were made to 403(b) plans since that time and to diminish the extent to which 403(b) plans differ from other salary reduction arrangements, like 401(k) plans.

3.  When do the regulations become effective?

The final regulations are effective July 26, 2007, but most provisions do not apply until Jan. 1, 2009.  There are notable exceptions to the Jan. 1, 2009 effective date:

  • New rules on transfers within and between 403(b) plans took effect on Sept. 25, 2007.
  • The new regulations do not apply to plans maintained to satisfy a collective bargaining agreement until the earlier of (1) the date the collective bargaining agreement terminates or (2) July 26, 2010. 
  • A 403(b) plan of a church-related organization for which authority to amend the plan is held by a church convention generally has until Dec. 31, 2009 to comply with the new regulations.  
4.  Will our organization need a written plan document?

The new rules will require that all 403(b) plans – including tax-deferred accounts that do not adhere to ERISA,  the Employee Retirement Income Security Act – be administered in accordance with a written plan document that meets specific requirements. 90 percent of 403(b) plans are non-ERISA, which means they don't now file and annual IRS Form 5500 or have plan documents. Most employers will have to adopt a new or restated plan document by Jan. 1, 2009. Employers who use multiple providers for their plan may use one plan document so long as the document identifies the approved fund providers. The IRS expects to issue a model plan that can be used by public school districts. 

In addition, under the new regulations plan sponsors are responsible for monitoring compliance in operation of their plans, taking into account all contracts of a participant under the plan. In particular, the regulation expressly provides that reliance on employee self-certification is no longer acceptable to satisfy certain 403(b) requirements, for example, for loan limits or hardship withdrawals, as has been the widespread practice in the past. Thus, plan sponsors will have to be more involved in compliance matters, or rely on service providers, including for old contracts. Reliance on one fund-service provider may not be practical. 

[Mutual of America is reviewing the regulation and will be providing employers who sponsor 403(b) plans and TDAs with more information about this requirement.]   

5.  Must we allow all employees to make salary reduction contributions?

Generally, yes. The new regulations, like prior guidance, require that the opportunity to make elective deferrals must be made available to all eligible employees. Some of the excludable classes of employees under prior IRS guidance are no longer excludable under the final regulations, most notably union employees, certain visiting professors and religious order employees under a vow of poverty. 

Excludable classes of employees under the final regulations include nonresident aliens with no U.S. source income, certain students, certain employees eligible to make elective deferrals to another 403(b) plan of the employer or to a 401(k) or government 457(b) eligible deferred compensation plan of the employer and, subject to new complicated rules, employees who are scheduled to work fewer than 20 hours per week. 

However, ERISA plans cannot use the “fewer than 20 hours per week” exclusion. In addition, for purposes of elective deferrals only, a plan cannot include a minimum age or service requirement.  Plan sponsors should review their current plan to determine if any employees are currently excluded from making elective deferrals. 

6.  Do the final regulations impose withdrawal restrictions on employer contributions?

Yes. Under the new regulations, employer contributions cannot be distributed until the participant terminates service, becomes disabled or after the occurrence of a specific event or attainment of a specific age, for example, the employee completes five years of participation in the plan, or attains age 59 ½.  [Most of the 403(b) Thrift plan documents drafted by Mutual of America already contain similar restrictions.] In addition, the regulation provides a grandfather rule from this requirement, which requires some clarification but appears to grandfather participants covered under a contract prior to 2009.

7.  Can participants transfer between 403(b) plans or to different fund providers as they did in the past?

The new regulations revoke Revenue Ruling 90-24, which allowed transfers between 403(b) contracts.  As explained previously, the new rules still allow such transfers, but impose stricter provisions making it more onerous to affect a tax-free exchange.  A letter discussing these new rules will be sent to plan sponsors shortly.

8.  If we terminate our 403(b) Thrift plan, can we have all assets distributed?

The new regulations allow plan sponsors to terminate their 403(b) plans and distribute all assets to participants or their beneficiaries. The new rules provide that a plan is not terminated unless all assets are distributed either in cash (including rollovers) or as individual, nontransferable deferred annuity contracts meeting certain 403(b) requirements. [The current Mutual of America Thrift and TDA contracts do not permit distribution on plan termination. We will be reviewing these provisions and will provide further information in the future.]

9.  What changes were made to the rules governing catch-up contributions?

403(b) plans allow participants who are age 50 or over to make “age 50 catch-up” contributions – the catch-up limit was $5,000 in 2007. Additionally, participants employed by certain “qualifying employers” who have more than 15 years of service with that employer may be able to make “special 15-year catch-up” contributions. These are generally, the least of three limits computed according to technical rules but never more than $3,000 per year to a maximum of $15,000 for all years. 

The final regulations clarify how these two catch-up amounts should be coordinated.  Basically, if a participant is eligible to make both an “age 50” and a “special 15-year” catch-up contributions, he or she must first use the “15-year special catch-up” before using the “age 50” provision.  Eligible participants can use both catch-up provisions in the same year.  

10.  What do the new regulations require in regards to the timeliness of remitting participant contributions to fund providers?

The new regulations adopt the same current standard applicable to ERISA plans under U.S. Department of Labor regulations on the time required for remittance of participant contributions.  As with ERISA plans, participant contributions must be remitted to fund providers as soon as administratively feasible, but no later than 15 business days following the month in which the amounts were deducted from the participant’s salary.  However, the DOL has indicated it is currently reviewing its existing regulation and intends to revise it soon to greatly shorten that permitted time. Indications are that DOL believes remittance can now be made within a few business days of each payroll period and plans to revise its regulation accordingly.

11.  Can we still maintain a non-ERISA tax-deferred account if we will now have to have a written plan document and be responsible for operational compliance?

The DOL issued guidance that discusses precisely that question and Mutual will provide more information in the future. However, it appears it may be difficult to do so as a practical matter because monitoring compliance while still having multiple providers may not be possible without some plan sponsor involvement. Plan sponsors may want to consider whether it continues to make sense to try to maintain non-ERISA status after these requirements become effective.

More questions? Contact Lee Robinson at Mutual of America, (808) 532-1055 or honolulu@mutualofamerica.com.