New 403(b) Rules in Effect; Are You on Track?
by Doug BertossiIt has been nearly two years since the U.S. Department of the Treasury released the most significant revisions to 403(b) plans in more than 40 years. After all of the preparation and anticipation, these regulations became effective for tax years beginning on January 1, 2009. These final regulations diminish the extent to which 403(b) plans differ from 401(a) qualified plans. These changes impact nonprofit organizations, public school districts, colleges, and universities, and they apply to all types of 403(b) plans, including plans that have only employee salary deferral contributions.
Adopting a written 403(b) program
One of the most significant regulation changes, which applies to both the Employee Retirement Income Security Act (ERISA) and non-ERISA 403(b) programs, is the adoption of a written 403(b) program. The written plan document must contain all material terms and conditions available under the plan, including eligibility, contributions, limitations, benefits, and optional provisions. It must also identify investment vendors that have been approved under the plan.
A little relief
With the release of the final regulations, however, the Treasury also issued IRS Notice 2009-3, which offers relief to 403(b) plan sponsors regarding the written program requirement. Announced December 11, 2008, it applies to the 2009 calendar year and may not be relied upon for any prior or subsequent year.
Under the notice, a 403(b) plan will not fail to satisfy the written plan document requirements during the 2009 calendar year if:
- A written plan intended to satisfy Internal Revenue Code (IRC) 403(b) is adopted by the plan sponsor on or before December 31, 2009, with an effective date of January 1, 2009. (Prior to the issuance of the notice, written plan documents had to be adopted by December 31, 2008.)
- The plan sponsor operates the 403(b) plan in accordance with a reasonable interpretation of the final IRS 403(b) regulations.
- The plan sponsor corrects any operational failures that occur during 2009 before December 31, 2009, in accordance with the IRS’s Employee Plan’s Compliance Resolution System (EPCRS).
Simply put, this means that plan sponsors have until December 31, 2009, to fully adopt a written 403(b) program. This move was intended to offer relief to those that have taken the steps to comply with the written program requirement in the final regulations. It allows them to ease into the new requirements and helps ease the stress of implementing such vast changes.
Form 5500 filing requirements
In addition to the 403(b) changes, in November 2007, the Department of Labor released revisions to the
Form 5500 filing requirements for 403(b) plans. The changes contain, among other items, the provision that 403(b) pension plans subject to Title I of ERISA will now be treated the same way under the new regulations as any other Title I pension plan. This means certain 403(b) plans will now be subject to an audit, similar to 401(k) plans. These new tax filing requirements create an additional reason for plan sponsors to prepare for the possibility of an audit.
Are you compliant?
To ensure compliance with the 403(b) regulations, we recommend taking the following steps:
- Identify all plans and arrangements subject to Section 403(b).
- Understand the additional compliance requirements for Section 403(b) plans.
- Document required changes and update plan documentation.
- Assess areas of past noncompliance and make appropriate corrections.
- Communicate changes to affected plan participants.
- Develop administrative policies, procedures, and internal controls regarding plan operation in accordance with the written plan documentation and Section 403(b).
- Develop action plans to maintain plan compliance.
- Understand the changes to the annual Form 5500 reporting and audit requirement for ERISA 403(b) plans.
- If applicable, begin gathering current and historical plan accounting records and financial information to prepare for the Form 5500 reporting and audit requirement.
The written plan document and Form 5500 regulations are just a couple of the new rules governing 403(b) plans that became effective January 1, 2009. If you haven’t already done so, it’s time to prepare—don’t risk noncompliance.