Ask the Expert – Discontinued 403(b) Plan Contracts

April 15, 2008 ((b)lines) - A 403(b) plan sponsor says there seems to be one question about vendor consolidation that hasn't been clearly addressed in general IRS publications - namely, what happens to contracts held by employees whose 403(b) providers were discontinued by the plan after 2005 and before 2008 (the regulations require plans to identify contracts available since 2005, those not identified in which assets are held can be considered taxable)? The sponsor asks: Is there any danger to our employees whose assets remain in contracts or custodial agreements with discontinued providers that their accounts will become taxable to them under the IRS' general statement that they may "fail to meet the requirements of 403(b)?"

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