Document or Not, 403(b) Regs Are in Effect

No doubt those 403(b) plan sponsors that have never had a plan document in place breathed a huge sigh of relief when the IRS issued this “gift” (see IMHO: The Gift of Time ), but so too did many sponsors already operating under a written plan document. According to a recent survey sponsored by the Principal Financial Group, and conducted by the Profit Sharing/401k Council of America (PSCA) – 41% of 385 respondents say they need to make changes to their 403(b) plan to comply with the new regulations, and just about one-in-ten said they were unsure of their plan’s ERISA status (see 403(b) Plans Have Some Work to Do ).

However, according to Chris Cumming, Senior Vice President, Great-West Retirement Services, getting a formal, written plan document in place was the softer side of the sweeping IRS regulations. The greater challenge is presented – and there was no extension in the January 1 effective date here – by the requirement to administer the plan in compliance with the new regulations. Sponsors still need to operate their plans as if a document is in place, ensuring cooperation among vendors, monitoring contribution and withdrawal limits, and issuing loan and hardship approvals, he warns.

Richard Turner, Vice President and Deputy General Counsel, AIG Retirement, adds that sponsors must have practices, procedures, and policies in place on 1/1 still, but the relief from the written plan document requirement (see IRS Offers Relief on 403(b) Written Plan Requirement ) does give them a little more time to memorialize the specifics of their new arrangement.

Pamela Reid, Senior Consultant, Governance and Compliance Advisory Group, Towers Perrin, and a former Employee Retirement Income Security Act (ERISA) attorney, advises that sponsors have a game plan at the outset of 2009 to be able to demonstrate compliance with the new regulations. She says that hopefully sponsors have already confronted issues such as what features to offer in the plan, the allocation of responsibilities for administrative tasks, coverage and non-discrimination requirements, and ERISA governance.

The good news is the IRS relief took the heat off sponsors, especially those that do not have effective committees in place to approve the document, and attorneys, Cummings says. The extension gives them time to think about how they want to run their plan, what features to include, and how to make it a more meaningful plan for participants. It also gives them an opportunity to get that formal document right the first time. For those who don't, the IRS is working on additional guidance and a prototype plan program (see IRS Developing Pre-approved Plan Program for 403(b)s ), so Cummings says those who have already adopted a plan will likely take the additional guidance and make changes, and those without a plan will opt for the prototype.

Of course, those that already have a document and procedures in place need not take advantage of the administrative grace period, but for those without all the pieces in place, it helps, according to Turner - especially for those having trouble with the bureaucracy of getting the plan approved.

Turner also points out that for public education sponsors, the IRS has provided model language that offers the same comfort in reliance associated with a pre-approved prototype program (see IRS Offers Model 403(b) Plan Language for Public Schools ). However, in the tax-exempt world, this 403(b) prototype program will have a greater impact because other plan types weren't provided with model language. The extension for 403(b) plans gives them time to wait for the IRS program, and depending on the timeline of program placement, it will may sense for plan sponsors to wait. Turner says he thinks that was a part of the IRS' thinking in offering the deadline extension.

Recognizing that many 403(b) programs include a multitude of vendor offerings, the final IRS regulations allowed sponsors to put together individual contracts and other communications to comprise the plan document. Turner says those who have done that may take another look now that they have more time and decide to create a consolidated plan document, though some may continue with this "binder clip" approach, such as state governed plans where so many plan provisions are dictated from state rules. "There isn't a one size fits all solution, so the binder clip approach may work best for some," Turner says.

Reid adds that sponsors that create a document that incorporate other contracts may have conflicts with specific vendor contracts with inconsistent provisions, so it may be best to take advantage of the IRS' flexibility in putting together plan communications to use as the plan document.

Cumming speculates that once into the daily grind, 403(b) sponsors may realize they need a third party administrator to help with plan administration, or may decide to limit loans and hardships to a single vendor once they see how complicated it can be to coordinate balances across multiple vendor accounts to see if a participant is eligible for a loan or hardship. They may even realize that having fewer vendors is easier for administration. In fact, the delay in implementing the written plan document requirement can allow plan sponsors to "test drive the new regs" and maybe add more features or not as many, Cumming says.

Edwards says that clients of Towers Perrin do not have a burning desire to make changes unless they are forced to, so she doesn't anticipate a "try before you buy" trend; however, sponsors may find that things they have not changed from before are now too burdensome to administer and decide to make changes going forward. She suggests sponsors look to vendors early to see if they offer any help in administration that can help avoid changes and corrections later.

Cummings notes there will be some remedial amendment period if plans did operate outside of plan terms, and the IRS will allow corrections. However, Turner points out that if sponsors adopt a plan later in the year, they must go back to January 1 and see if they operated in compliance with their written plan; the longer they wait, the more time they will potentially have to cover to clean up and use the IRS' self correction program to match plan provisions.

Reid advises that plan sponsors do a mid-year review to see if there are any inconsistencies between plan operation and document provisions to see if corrections are needed. Cumming adds that sponsors should keep a paper trail in case they are audited to show they did monitor plan limits and comply with other regulations.

No matter what the IRS relief means to plan sponsors, they should keep in mind that the "purpose of a plan document is to set down in writing how the plan will operate. It is essential to plan participants to give them assurance that the plan is fair and has purpose to help them save for retirement. It is a good thing," Reid concludes.