- 403(b) Plans Need Your Attention Now!
- December 2, 2009
- Law Firm: Baker & Hostetler LLP - Washington Office
All entities sponsoring 403(b) plans for their employees need to make sure that their plans have been properly amended to comply with the new IRS regulations before the end of 2009. Also, plan sponsors should review their 403(b) plans’ operational compliance during this year and retroactively correct any failures before the end of the year.
Plan Document Requirement
Initially final regulations under Code § 403(b) required sponsors of § 403(b) plans to have a plan document in place by January 1, 2009. In a 2008 Notice, the IRS extended that deadline. Plan sponsors now have until December 31, 2009 to adopt a written plan that satisfies the requirements of the final regulations (effective as of January 1, 2009). In order to avail itself to this relief, the plan sponsor has to operate the plan in accordance with a reasonable interpretation of the law and, before the end of 2009, must take actions to correct any operational failures occurring during the 2009 year.
PLAN SPONSORS CANNOT WAIT UNTIL THE LAST DAY IN DECEMBER TO AMEND THEIR PLANS AND IDENTIFY AND CORRECT ANY PROBLEMS THAT MAY HAVE OCCURRED IN 2009.
403(b) plans that allow employees to defer a portion of their salary to the plan, but do not provide for employer contributions, are subject only to the “universal availability” rule. This means that all employees of an eligible employer must be eligible to elect to make deferrals to the 403(b) plan.
However, 403(b) plans providing employer contributions must satisfy the coverage and non-discrimination rules under Code §§ 410(b), 401(m), 401(a)(4) and 401(a)(6). Prior to the enactment of the final regulations, plans generally relied on a “reasonable good faith” standard to comply with these rules. Beginning in 2009, this standard is no longer available.
EMPLOYER SPONSORS WHO MAKE CONTRIBUTIONS ON BEHALF OF THEIR EMPLOYEES TO 403(b) PLANS NEED TO CONSULT WITH THEIR RECORDKEEPERS TO DETERMINE IF COVERAGE AND NONDISCRIMINATION TESTS MAY BE A PROBLEM FOR 2009. EMPLOYERS MAY WANT TO CONSIDER ADOPTING A SAFE HARBOR 403(b) FORMULA.
Allocation of Administrative Duties
Under the final regulations, the plan document may allocate to the employer or another entity (but not to the employee) responsibilities for performing functions to administer the plan, including functions to assure compliance with Code § 403(b) and its regulations.
PLAN SPONSORS WILL NEED TO NEGOTIATE WITH VENDORS THAT THEY EXPECT TO ASSUME ADMINISTRATIVE RESPONSIBILITIES FOR THE 403(b) PLANS. THE PLAN DOCUMENT NEEDS TO SPECIFY WHO WILL BE PERFORMING ADMINISTRATIVE RESPONSIBILITIES. CURRENT CONTRACTS WITH VENDORS WILL NEED TO BE AMENDED OR NEW CONTRACTS WILL NEED TO BE EXECUTED.
New Rules for “Exchanges” and “Transfers”
The new regulations no longer permit “90-24 transfers.” Participants can no longer unilaterally transfer monies freely from accounts held in the plan to accounts outside the plan. The new rules require that transfers occur between “approved vendors” and/or “unapproved vendors” who have entered into Information Sharing Agreements.
In implementing the new regulations, employers may ignore certain contracts and transfers: (i) a 90-24 transfer occurring on or before September 24, 2007; (ii) accounts of former employees that have not received any contributions after December 31, 2004; and (iii) 403(b) contracts issued between 2005 and 2008 held for former employees or their beneficiaries that have not received contributions after December 31, 2008. For 403(b) accounts for active employees issued between 2005 and 2008 that have not received any contributions after December 31, 2008, the employer must make a good-faith reasonable effort to obtain information about the unapproved vendors and provide the vendors with the name and contact information of the party responsible for 403(b) compliance for the plan. This enables the vendor to contact the plan administrator prior to making a participant loan or distribution.
IF PLAN SPONSORS HAVE NOT YET SURVEYED PLAN PARTICIPANTS TO DETERMINE IF THEY MAY HAVE CONTRACTS OR ACCOUNTS WITH UNAPPROVED VENDORS, THIS SHOULD BE DONE IMMEDIATELY. IF CONTRIBUTIONS TO UNAPPROVED VENDORS ARE MADE IN 2009, INFORMATION SHARING AGREEMENTS MUST BE EXECUTED.
Any non-governmental and non-church plan sponsors of 403(b) plans need to determine whether the plan is governed by ERISA. In limited circumstances, ERISA coverage may be avoided. If an employer does not contribute to the 403(b) plan and has only minimal ministerial administrative involvement with the plan and all rights under the contract or the account is enforceable solely by the participant or beneficiary, then ERISA will not apply. On the other hand, if the plan sponsor makes contributions to the plan or approves participant loans, authorizes hardship withdrawals, processes plan distributions or undertakes other discretionary administrative acts, then ERISA rules would apply.
ERISA requires 403(b) plans to file Form 5500. Previously, 403(b) plans had been subject to very limited annual reporting requirements. However, the final regulations eliminated the special annual reporting requirements for 403(b) plans. Moreover, 403(b) plans with 100 or more participants (“large plans”) must include audited financial statements with their Form 5500. Moreover, all plans must now comply with the new reporting requirements for plan fees and expenses on the 2009 Form 5500.
Because of concerns expressed by employers that they may not be able to obtain financial data needed to satisfy Form 5500 reporting requirements, the Department of Labor (“DOL”) issued Field Assistance Bulletin (FAB) 2009-02 on July 30, 2009, which provided transition relief for administrators of 403(b) plans. Pre-2009 annuity contracts and custodial accounts are not treated as part of the employer’s ERISA plan or as plan assets for purposes of Form 5500 filing requirements. Further, former or current employees holding these contracts or accounts are not counted as participants for annual reporting purposes. The pre-2009 contracts or accounts are subject to this exemption only if: (i) no contributions have been made to them on or after January 1, 2009; (ii) the rights under the contracts or accounts are solely enforceable by the participant or beneficiary; and (iii) the owners of the contracts or accounts are fully vested in them.
PLAN SPONSORS NEED TO DETERMINE WHETHER THEIR 403(B) PLANS ARE COVERED BY ERISA OR NOT. IF SO, THEY NEED TO MAKE SURE THAT THEY RETAIN A FIRM TO INDEPENDENTLY AUDIT THE 403(B) PLAN (IF APPLICABLE) AND THEIR PLAN VENDORS ARE WILLING AND ABLE TO PROVIDE FEE AND EXPENSE INFORMATION REQUIRED IN FORM 5500.
Section 403(b) final regulations require substantial changes in the way these plans have been operated in the past. It is important that plan sponsors understand these changes so as to maintain the tax advantages to participants and beneficiaries. Some 403(b) sponsors may even consider changing their 403(b) plans to 401(k) plans.