403(b) plan changes begin to increase burden on nonprofits

“Nonprofits will have to kick a 40-year-old habit of handing off responsibility for defined-contribution plans to vendors,” says Marie Leone of CFO.com. The reason? The Internal Revenue Service in late July revamped the existing tax code. Now employers will have to take greater responsibility for developing and overseeing 403(b) retirement plans.

The new rules don’t go into effect until Jan. 1, 2009, but some 403(b) changes have already taken effect. When the changes are complete, the administration of 403(b) plans will fall into line with rules governing 401(k)s, which are also offered by some nonprofits.

Like companies that sponsor 401(k) plans, non-profit 403(b) sponsors will have to prepare written plan documents and become their plan's chief administrators and primary fiduciaries, responsible and liable for its proper administration. In the past, it was unclear which organization – the employer or plan vendor – was accountable.

“For decades,” Leone writes, “many non-profits, hoping to avoid the arduous administrative duties of a 403(b), set up the plan's automatic payroll deduction process and then bowed out. Indeed, nonprofit employers allowed insurance companies, mutual funds and other third-party vendors that sold plan investment products to develop plan documents and deal directly with employees.” Now all that is changing.

Click here for more on 403(b) changes and how they will affect your organization.