• 403(b) Regulations: Compliance Deadline Looms at End of 2008
  • August 28, 2008 | Authors: Steven D. Kittrell; Adrienne L. Walker Porter
  • Law Firms: McGuireWoods LLP - Washington Office ; McGuireWoods LLP - Chicago Office
  • 403(b) plans (otherwise known as tax-sheltered or tax-deferred annuities) are retirement plans sponsored by 501(c)(3) not-for-profit organizations, schools, certain religious organizations, hospitals and state and local governments under Section 403(b) of the Internal Revenue Code. The deadline for compliance with far-reaching, final 403(b) regulations issued in 2007 is fast approaching. There are many issues to consider in achieving compliance by the January 1, 2009 deadline. 403(b) plans that fail to comply risk losing the tax advantages of such plans.


    In July 2007, the Internal Revenue Service and Treasury Department issued the long awaited Final Regulations providing Section 403(b) guidance. This represented the first significant guidance in over forty years regarding 403(b) plans. Now, the compliance deadline is fast approaching. Most requirements must be met by January 1, 2009.

    These requirements include developing written plan documents, complying with plan-to-plan transfer rules, developing nondiscrimination testing procedures, and following precise distribution, funding and plan termination rules to mention a few. Plan sponsors should take the time now to review the Final Regulations and guidance to determine the necessary steps for compliance. This article highlights some of the key requirements.

    Written Plan Document

    The written plan document requirement is one of the most significant new requirements. Even if plan sponsors have existing plan documents, plans should be reviewed for compliance with the Final Regulations. For the first time, a written plan must contain all material terms and conditions for eligibility, benefits, limitations, contracts included in the plan, and distribution rules. Like 401(k) plans, optional provisions (such as loans and hardship distributions) must be detailed in the written plan.

    Contract Requirements

    Most 403(b) plans are funded either through annuity contracts or custodial accounts, and the Final Regulations include requirements for these contracts. For example, contracts must specify that upon vesting, participant benefits are non-forfeitable. The Final Regulations also require contracts to contain provisions describing the limits on elective deferrals, minimum distribution rules, rollover distribution rules and limits on incidental benefits.

    Plan sponsors are advised to review all contracts and account documents to ensure that their terms are consistent with the plan documents. If using more than one vendor (e.g., insurance company or custodian), plan sponsors should determine who will administer any discretionary plan features such as participant loans and hardship withdrawals that require dealing with a participant’s plan account as a whole. As mentioned above, the written plan document must also include a list of annuity contracts and custodial accounts available to participants.

    The Final Regulations further include new rules relating to the exchange of 403(b) contracts. An information sharing agreement is required for contracts or accounts that are not receiving contributions under the 403(b) plan. The information sharing agreement between the contract provider and the plan must ensure that sufficient information is shared to ensure the exchanged contract complies with the plan’s requirements.

    Testing Requirements

    403(b) plans will be required to do new nondiscrimination testing. In the past, many 403(b) plans were able to rely on safe harbor or reasonable good-faith compliance standards. Beginning on January 1, 2009, 403(b) plans will be required to make participant rights “universally available.” “Universally available” means providing consistent standards with regard to age, service requirements and waiting periods (although some exceptions apply). Periodic discrimination testing must be conducted. If the plan does not pass testing, related changes will have to be made.