CUPA-HR eNews

Preparing Your Action Plan for the New 403(b) Regulations
By Linda Segal Blinn, J.D., vice president of Technical Services, ING
August 21, 2007

 

At long last, the IRS has released its final regulations governing 403(b) tax deferred annuity programs. Now that the final guidance is here, what should human resource professionals consider in developing an action plan for their colleges and universities?

 

First of all, remember that the IRS guidance applies to all 403(b) programs. Even if your institution’s 403(b) program consists only of employee salary reduction contributions, that program is within the scope of the IRS final guidance. So, your first action step is to help educate your college or university to the IRS’ way of thinking — your institution’s involvement in the 403(b) program will not simply be limited to remitting employee contributions to investment providers.

 

In fact, the IRS would caution that your 403(b) program is in fact an employer-sponsored plan, with a list of roles and responsibilities of which your institution will need to be aware. In general, starting January 1, 2009, you and your institution’s administration will need to establish a written plan, make decisions about the features you want in your 403(b) program, approve disbursements from your program, and remind your employees of the opportunity to save for retirement through your program.

 

Establish a Written Plan
As the “plan sponsor,” your college or university will need to develop written rules of the road to operate the 403(b) program. If you are a private college whose 403(b) program is subject to the Employee Retirement Income Security Act of 1974 (ERISA), chances are that the plan document that is required of ERISA 403(b) plans will meet the IRS rules. However, if your 403(b) program is sponsored by a public institution, or if your 403(b) program only accepts employee contributions and is offered by a 501(c)(3) organization, you will need to capture the ground rules.

 

According to the IRS guidance, a 403(b) “plan” will need to capture the following required elements: 

 

  • Employees eligible to participate in the program;
  • Benefits available under the program;
  • Applicable IRS limits on the maximum amount of contributions that can be made annually, the amount of annual compensation taken into account on which contributions can be based and the maximum amount that can be taken as a loan from the program;
  • The investment providers that can receive ongoing contributions under the program;
  • The requirements for an employee to take a distribution from the 403(b) plan and in what form those benefits may be paid out; and
  • The names of any parties to whom your institution will be delegating responsibilities of any compliance functions under the 403(b) plan and the specific roles that they will be taking as part of that delegation.

 

If you are a private college or university whose 403(b) program is not currently subject to ERISA, the Department of Labor has issued guidance to help you understand the conditions under which you can maintain that non-ERISA status in light of the IRS final guidance.  According to the Department of Labor, if your college continues to have only ministerial involvement (e.g., administrative review of plan administration, limiting the number of vendors) and there are a reasonable number of diverse investments, then your 403(b) program will still be considered non-ERISA. However, employer involvement such as authorizing transfers, processing distributions, approving hardships or negotiating product features may cause your 403(b) program to become subject to ERISA. And keep in mind the DOL will be making these determinations on a case-by-case basis.

 

Make Decisions About the Features You Want in Your 403(b) Program
Not every feature your 403(b) program offers is considered by the IRS to be a required element. For example, the ability to take a loan or a hardship withdrawal; transfer among investment providers either under your institution’s 403(b) program or to another employer’s plan; accept rollovers into your institution’s 403(b) program; or make an employer contribution on behalf of participants in your school’s 403(b) program all are considered to be optional features of the 403(b) plan.

 

Bottom line, according to the IRS, if your institution’s 403(b) program will be offering any optional features, they also must be included in the written 403(b) plan.

 

Approve Disbursements From Your 403(b) Program
As the 403(b) plan sponsor, you will need to make sure that amounts paid out of the 403(b) program are consistent with the IRS rules governing when disbursement can be made. As a result, you (or another party whom you hire to provide such services) must determine whether your participants are entitled to a hardship withdrawal, loan or other distribution from the 403(b) program and, if so, approve that transaction.

 

You will need to be prepared to share information with your service providers to accomplish this. The IRS will require that 403(b) sponsors share on an ongoing basis employee information (for example, employment termination date or hardship approvals) and participant account information (such as account values across all retirement plans that your college offers and whether there are any other loans outstanding from those other plans). While the formal written infrastructure for this must be in place by January 1, 2009, the IRS has warned that if your 403(b) program permits transfers among investment providers after September 24, 2007, information sharing protocols will apply.

 

Remind Your Employees of the Opportunityto Save for Retirement Through Your 403(b) Program
The IRS has been vigilantly ensuring that all employees who are eligible to participate in their employer’s 403(b) program know that they have the opportunity to do so. The final 403(b) regulations reflect this, requiring that employers provide “meaningful notice” at least annually to their eligible employees reminding them that they can make either pre-tax or, if permitted by the plan, Roth 403(b) contributions to the 403(b) program; how to make or change a deferral election; and how much can be contributed annually to the 403(b) program. If your program allows employees to decide whether and how much they want to contribute to the plan, then your institution will need to start sending these annual notices.

 

 

Consider the IRS guidance a call to action. Particularly if your 403(b) program will continue to allow transfers among providers after September 24, 2007, you cannot afford to delay working on your action plan. You should begin now to:

 

  • Gather plan related documentation. You likely have already captured many of your 403(b) program’s features in employee handbooks, service agreements, investment products and internal procedures. Use this as the jumping off point for developing your written plan.

 

  • Determine if your institution will continue to allow transfers among investment providers. If so, think about how your 403(b) program can balance the new information sharing requirements with the ability to transfer among investment providers. Will you permit transfers among any providers or only those which also accept ongoing contributions? Remember that this is the one area where you will need to make a decision quickly, as that September 25, 2007, date is looming.

 

  • Devise a communication strategy for your employees. Don’t forget that most of these changes impact your employees. Just as your institution’s role in the 403(b) program is expanding, the ability to make decisions unilaterally is reduced. You will want to explain how these new IRS rules will impact the operation of the 403(b) program.  

 

  • Seek help from those with 403(b) expertise.You don’t have to create your action plan alone. Seek providers that will support you with the tools, knowledge and services you need to ensure your 403(b) plan runs smoothly and meets the IRS regulations. Help is just a click away at www.ing.com/us/403bregs or a call away at 1-800-238-6231.

 

(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.)