(b)lines Series: 403(b) Final Regulations - Plan and Contract Terms

March 18, 2008 ((b)lines) - Final 403(b) regulations issued by the Internal Revenue Service require that all 403(b) programs have in place a written plan document and specify what must be included in the plan document. The regulations do allow for a plan document that is a compilation of vendor contracts and other plan communications as long as the result includes all the terms required by the IRS.

The main provisions regarding the written 403(b) plan and 403(b) contracts as outlined by the Groom Law Group include:

Written Plan Requirement

Historically, a few 403(b) requirements have been required by statute to be in the underlying 403(b) contract (a term which in this context includes custodial account agreements and church retirement income accounts), and ERISA has always imposed a written plan document requirement on 403(b) plans subject to that law.   However, the final regulations impose, for the first time, a requirement under the Code that there be a written plan containing all material terms and conditions for eligibility, benefits, limitations, the contracts available under the plan, and the time and form of distribution.   In addition, any optional provisions (such as for loans and hardship distributions) must be set forth in the plan.

Significantly, the final regulations do not require a single plan document - the "plan" may incorporate by reference other documents, including separate contracts and related documents supplied by the annuity providers and account trustees or custodians.   For example, a "wrap document" - similar to the concept used in many ERISA-covered welfare plans - could supplement an annuity contract that contained certain terms.   However, the onus is on the employer to ensure that there are no gaps and that conflicts among documents are addressed.   This will be challenging in cases where there are numerous investment providers.

IRS intends to help address the potential costs associated with satisfying the written plan requirement for many employers that do not already have a written plan.   In this regard, the IRS in November published additional guidance for model plan provisions that may be used by employers to ease the administrative burdens of satisfying the written plan requirement (See IRS Offers Model 403(b) Plan Language for Public Schools).   The final rules also provide that a plan may allocate administrative responsibilities to the employer or another person - but not participants - to ease administrative burdens.   Those persons responsible for compliance with the applicable Code requirements should be identified in the relevant documents.

In conjunction with the final regulations, the Department of Labor (DoL) issued a Field Assistance Bulletin No. 2007-02 (FAB) to provide additional guidance on the extent to which compliance with the final regulations would cause employers to exceed the limitations on "employer involvement" permitted under the DoL's longstanding safe harbor for tax-sheltered annuity programs.   DoL Reg. § 2510.3-2(f).   In general, the DoL believes that complying with the final 403(b) regulations does not per se convert a salary-reduction-only plan relying on the safe harbor into a plan subject to ERISA - that analysis continues to be done on a case-by-case basis.   As discussed further below in our review of the FAB, this new written plan requirement may cause non-ERISA 403(b) plan sponsors relying on that regulatory exemption to look at it more closely to determine whether their plans have been or will continue to be exempt from ERISA.

What Must be in a 403(b) Contract

The regulations indicate that certain 403(b) provisions must be in the contract, including:

• nonforfeitability (which the final rules define by reference to the regulations under section 411 vesting rules for qualified plans, though, during the initial period the contract is unvested, the contract must at all times satisfy the 403(b) requirements),
• nontransferability (sec. 401(g)),
• limit on elective deferrals (the final regulations require a section 403(b) contract to include this limit (sec. 402(g)),
• minimum required distribution rules (including the incidental death benefit rule) (sec. 401(a)(9)),
• direct rollover rules (sec. 401(a)(31)), and
• limitation on incidental benefits (sec. 401(a)).

It is unclear whether the plan document could include one or more of those rules instead, especially in the case of a "wrap document."

What Must be in the Plan

The final regulations require that certain other 403(b) provisions be in the plan document, including:

• identifying the contracts and accounts available under the plan,
• coverage and contribution provisions,
• section 415 limits on annual additions,
• optional provisions (such as loans, hardships and transfers), and provisions coordinating and allocating compliance responsibilities.