Final 403(b) Regulations

With the arrival of the final 403(b) regulations, NACUBO hosted a webcast December 5, 2007, to address plan sponsor concerns and the potential impact on their responsibilities. Robert J. Architect, senior tax law specialist, Internal Revenue Service, (IRS) and Richard A. Turner, vice president and deputy general counsel, AIG VALIC, presented the most up-to-date information available. The good news is that many requirements in the final regulations are not new; and many that are new are not effective until January 1, 2009, or later.

Other key highlights include the following:

• The final regulations preserved most, if not all, of the flexibility described in the proposed regulations, permitting plan sponsors to structure their plans and allocate responsibilities as most appropriate for their specific plans.
• Governmental plans (including plans of public school districts, public colleges and universities, and public hospitals) and non-electing church plans are exempt from Title I of ERISA.
• The regulations restrict transfers to three types: transfers within the plan, transfers to another plan, and transfers to a state retirement system to purchase defined-benefit plan service credits.
• Voluntary 403(b) plans of private tax-exempt employers, which do not enjoy the governmental plan exemption from Title I of ERISA, may still be maintained with very limited employer involvement.

History of the Regulations

The IRS and the Department of the Treasury released final 403(b) regulations on July 24, 2007, which were published in the Federal Register on July 26, 2007, more than 2 ½ years after publication of proposed regulations in November 2004. The final regulations essentially follow the course set forth in the proposed regulations, with some modifications that were generally favorable to plan sponsors, plan participants, and plan providers.

Coinciding with the release of the final 403(b) regulations, the Department of Labor (DOL) released a Field Assistance Bulletin (2007-02) addressing the impact of the regulations on a private tax-exempt employer's ability to continue to maintain a non-ERISA voluntary 403(b) program. DOL guidance confirmed that agency's belief that it remains possible to satisfy applicable IRS requirements without causing the plan to become subject to the requirements of Title I of ERISA.

Plans already subject to the requirements of Title I of ERISA, and other larger plans with centralized administration, may need very little change as a result of the final regulations. Many non-ERISA plans, including plans sponsored by public colleges and universities, as well as voluntary non-ERISA 403(b) programs of private tax-exempt employers, likely will require more significant changes to comply with the new requirements.

Flexibility of 403(b)

The final regulations do not set forth a "one size fits all" approach. Rather, they preserved most, if not all, of the flexibility described in the proposed regulations, permitting plan sponsors to structure their plans and allocate responsibilities as most appropriate for their specific plans. Responsibilities can be allocated among the plan sponsor itself, the plan providers, and, if desired, additional service providers.

All 403(b) plans must be maintained pursuant to a written plan. This brings 403(b) plans in line with similar employer-sponsored plans but also retains much of the typical flexibility for governmental plans. The written plan must include basic provisions, such as:

• eligibility,
• benefits,
• limitations,
• available contracts and accounts,
• time and form of distributions, and
• roles and responsibilities under the plan.

Common concerns include whether multiple plans can be sponsored and if multiple documents will satisfy the written plan requirement. According to Architect, "While the regulations anticipate a single document per plan, they allow for the possibility that an employer may sponsor multiple 403(b) plans. They also allow that a collection of documents may potentially constitute the plan." This collection of documents can include the following:

• a formal plan document,
• state statutes and regulations,
• administrative procedures,
• annuity contracts and custodial agreements,
• lists of authorized providers and products, and
• service agreements setting forth the administrative responsibilities of authorized providers.

Even employers seeking to establish a single written plan document are likely to rely on outside documents as part of the plan, including the contracts and accounts authorized under the plan as well as the lists of authorized providers. Architect adds: "In any event, the key to satisfying the requirement with a collection of documents is, simply, to actually collect the documents into one place to demonstrate to concerned parties (and to the IRS in the event of an audit) that the requirements are satisfied." Employees can expect many plan providers to offer up sample plan documents.

Title I of ERISA

One critical question that arose during the webcast was whether the written plan would subject the arrangement to Title I of ERISA or to similar fiduciary obligations. Architect pointed out that governmental plans (including plans of public school districts, public colleges and universities, and public hospitals) and non-electing church plans are exempt from Title I of ERISA. Moreover, while state-defined-benefit pension systems are frequently subject to fiduciary standards under state law, those specific pension system statutes rarely if ever apply to voluntary 403(b) programs available to employees who participate in those same state pension systems. (Plan sponsors should always consult with legal counsel for guidance on specific state and local laws and regulations applicable to their plans.) In the case of private tax-exempt employers, the DOL has released guidance on the application of Title I of ERISA to plans sponsored by those organizations in light of the final 403(b) regulations.

What about transfers?

The regulations restrict transfers to three types.

1. Transfers within the plan, referred to as "exchanges." These transfers may be made only to contracts and accounts identified under the plan. These may include contracts or accounts to which contributions may also be made and may also include contracts or accounts for which the provider has an agreement with the plan sponsor to provide compliance support, including relevant data sharing between the employer and the provider.
2. Transfers to another plan, referred to as "plan-to-plan transfers." These transfers may be made to another plan maintained by a current or former employer of the participant.
3. Transfers to a state retirement system to purchase defined-benefit plan service credits. These already exist in current law.

It's important to understand that the first two transfer types listed above are subject to specific requirements including:

• The sending and receiving plans must both permit the transfer (in the case of an intra-plan transfer, or exchange, both are the same).
• The transferred amount must be subject to distribution restrictions that are not less than those imposed under the previous plan, contract, or account.
• The entire "accumulated benefit" (full or partial, and adjusted for applicable surrender charges, as appropriate) is transferred.

Employer Involvement, Fiduciary Responsibilities

Nothing in the final 403(b) regulations states or implies that employers are fiduciaries with respect to the 403(b) products purchased for their employees. To the contrary, the final regulations confirm that even voluntary 403(b) plans of private tax-exempt employers, which do not enjoy the governmental plan exemption from Title I of ERISA, may still be maintained with very limited employer involvement.

The DOL confirmed this point in a Field Assistance Bulletin that discussed plans of private tax-exempt employees, noting that the continued availability of an existing exemption for voluntary deferral plans depends on the extent of the employer's involvement. However, depending on state law and the scope of the responsibilities that a public employer has elected to assume under the plan, that employer may take on new responsibilities (whether or not characterized as fiduciary responsibilities) that are greater than those imposed under the 403(b) regulations.

Of course, public institutions are free to voluntarily assume fiduciary, or fiduciary-like, responsibilities under their 403(b) plan, assuming there are no restrictions on the assumption of such responsibilities under state law. However, it is important to distinguish between a public employer's tax compliance responsibilities, its legal responsibilities to employees under state law, and whatever nonlegally mandated actions it chooses to take to provide a quality program for its employees. Fiduciary status would increase a plan sponsor's potential liabilities, and an employer should not take action that assumes or implies that it has such responsibilities without careful consideration and unbiased legal advice.

Other Changes

• Life insurance. Life insurance and similar incidental benefits are no longer permitted in 403(b) plans. The final regulations include a transition rule for policies issued before February 14, 2005.
• Nondiscrimination rules. The rules that went into effect in 1989 also apply to employer 403(b) contributions and nonelective employee 403(b) contributions made to plans sponsored by private tax-exempt employers (other than churches).
• Clarification of universal availability. All 403(b) plans other than church plans are subject to the universal availability requirement, which provides that if the employer permits any employee to make elective deferrals to the plan, the employer must allow all employees to do so, with certain limited exceptions. Examples of exceptions include employees who normally work fewer than 20 hours per week, employees who are not willing to contribute at least $200 in a year, and employees eligible to defer to another qualifying plan of the same employer.

Additional Resources

• Request IRS publications 4482, 4483, or 4484.
• Visit the IRS Web site.
• Visit NACUBO's Tax Page.

Tadu Yimam is a policy analyst at NACUBO; e-mail: tadu.yimam@nacubo.org