Aftermath: Preparing for after the 403(b) Compliance Deadline

August 25, 2008 ( - New 403(b) rules mean sponsors can look for more Internal Revenue Service audits following the January 1, 2009 compliance deadline.

However, Elaine Immerman, Associate General Counsel at TIAA-CREF, told attendees of The SPARK Institute’s 403(b) Plans Issues & Answers Forum, “The IRS is telling us they’re going to be reasonable.”

Plan sponsors scrambling to get into compliance have been focusing much on establishing a written plan document and information sharing agreements with plan vendors, but Immerman and David Kolhoff, Senior Counsel, Lincoln Financial Group, reminded sponsors of other provisions of the new regulations that should not be overlooked in preparation for an IRS audit. For example, Immerman noted that new restrictions on distributions from annuity contracts on the movement of money from annuity to custodial accounts would be an easy provision for sponsors to overlook.

In addition, sponsors need to remember that 403(b) plans will now have to make sure deferrals and contributions do not exceed IRS maximums, and that submission of contributions are now subject to a timing rule. There is also a new rule for the order of participant catch-up contribution types.

In addition, the new rules eliminate life insurance as a permissible plan funding vehicle.

Kolhoff noted that the issues making compliance difficult for plan sponsors include the task of establishing a plan document that does not conflict with provisions of annuity contracts or federal tax laws and state insurance laws. Getting vendors to sign information sharing agreements has also proved to be a daunting task, especially with vendors who are being eliminated.

In addition, many sponsors fear certain plan provisions and vendor decisions will cause them to lose their exemption from Employee Retirement Income Security Act (ERISA) fiduciary obligations, Immerman added.

Immerman and Kolhoff suggested a number of options for employers that could make compliance after the January 1, 2009 deadline simpler.

Sponsors could reduce the number of vendors offered in their plans, but Immerman reminded sponsors that they need to make sure this can be done legally in compliance with state laws or collective bargaining agreements. Sponsors still need to attempt to establish information sharing agreements with orphaned vendors.

In a multiple vendor environment, sponsors can simplify compliance by providing that all loans and withdrawals be made out of one vendor's products. Sponsors can also choose a single vendor or a third party administrator to handle recordkeeping for the plan.

Finally, compliance can be made simpler by eliminating transfers to unapproved vendors or eliminating plan features (i.e. loans, hardship withdrawals) that make compliance difficult.