Yes, there is some risk that contracts or custodial agreements with providers who were discontinued as plan providers in the 2005-2008 period could fail to meet the 403(b) requirements. However, there are some simple steps an employer can take to fulfill its duties under the 403(b) final regulations while also working to protect its employees.
In November 2007, several months after the final 403(b) regulations were issued, the IRS provided additional guidance specifically addressing contracts issued before 2005 and discontinued between 2005 and 2008 that cease to receive contributions during this period.
Under this guidance, an employer is not required to obtain an information sharing agreement. Instead, the employer must make a “good faith” effort to include these discontinued provider contracts in its 1/1/09 403(b) plan. “Good faith” includes either:
(1) an employer making an effort to collect information concerning the issuers of the discontinued provider contracts and notifying these issuers of the person in charge of administering the 403(b) plan for purposes of coordinating the 403(b) plan requirements, or
(2) alternatively, an issuer making a reasonable, good faith effort to contact the person in charge of administering the 403(b) plan to exchange the information necessary to comply with the final 403(b) regulations before making a distribution or a loan.
While an information sharing agreement would appear to satisfy these requirements, it is not specifically required.
Keep in mind, too, that the same IRS guidance also imposes only a reasonable, good faith compliance effort for contracts of former employees as of January 1, 2009.
Whether or not the discontinued providers’ contracts comply with the 403(b) requirements in 2009 and going forward is the responsibility of the providers of these contracts. We have spoken with many providers who are working to update their contracts for January 1, 2009, but there is always the chance that one or more providers may not be 403(b)-compliant (or that an employee does not get an updated endorsement if one is needed). Ultimately, though, the employer and employee should look to and work with the provider for assurance.
– David Levine, Groom Law Group
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