End-of-year Checklist for Non-ERISA 403(b)s

Richard Turner, Vice President and Deputy General Counsel, VALIC, told attendees to keep in mind that the new regulations are a result of findings from Internal Revenue Service plan audits, and the IRS will be looking for improvements.

Though the effective date of having a written plan in place was extended to December 31, 2009, the relief was conditional on plans operating in compliance with the new regulations effective this year, so sponsors should look back and clean up any operational defects in plan administration.

Turner reminded attendees that contributions generally must be deposited by the 15 ^th of the month following their deferral from participants’ pay. If using a common remitter, the timing rules apply to receipt of contributions by underlying vendors, he noted.

One thing sure to be a focus of IRS audits is the requirement of universal availability, Turner contended. Basically, universal availability means if a plan allows anyone to participate, it must allow everyone to participate. However, employees who normally work less than 20 hours/week can be excluded. So, for newer employees, sponsors should ask if they expect those employees to work 1,000 hours in the next year, and for existing employers, sponsors should look back at hours worked in the prior year.

Sponsors must provide an annual notice of eligibility to employees. Turner suggested it is better to notify everyone, even those already participating, and he indicated there is no rule on when to notify or if notifications have to look the same or be delivered in the same way for all employee groups. For example, notifications can be emailed to one group and snail-mailed to another, he said.

The consequences of failure to comply with universal availability rules can be plan-wide, Turner warned. It could disqualify the plan and all participants’ deferrals could be taxable; however, he noted, usually the IRS just lets employers make contributions for left out employees.

Turner reminded attendees that exchanges are the movement of money among approved providers or with providers that have agreed to an Information Sharing Agreement (ISA), They are subject to plan restrictions and the requirement that the same amount that leaves one provider must be the same amount that shows up at other providers. Transfers are movement between plans of the same employer or between employers, and both plans must permit the transfer

Turner noted that ISAs are not required for approved providers, but if a provider is deselected after January 1, 2009, there must be ISA in place. He suggested sponsors get ISAs in place while a provider is still part of the plan to avoid problems with providers who may be angry over being deselected

Hardship withdrawal rules are now the same as with 401(k)s as far as reasons for which a hardship is allowed, and employee deferrals must be suspended for six months following a hardship withdrawal. There are also new restrictions on withdrawals of employer contributions to an annuity. Pre-existing contracts are grandfathered, but Turner said VALIC has mostly seen that existing withdrawal restrictions of contracts seem to satisfy the new rules.

For more about distribution and loan administration see Loans and Hardships: Testing One’s Patience in the New 403(b) World .

Turner warned that vendors must recognize their interaction with the plan; a contract may allow for loans, but if plan does not allow loans, the contract provider can’t issue one.

Rules concerning funding vehicles of 403(b) plans have also changed, Turner added. If a new account is being established, it must be an annuity contract or custodial account, life insurance is no longer allowed, but those previously established can continue to receive contributions, he said.

At the Webcast sponsored by VALIC, Richard Turner, Vice President and Deputy General Counsel at VALIC, noted that the key focus of the IRS final regulations is coordination across multiple vendors, whether they are intentional vendors or not.

According to Turner, if plans utilize a single vendor, and have only one 403(b), and it is the only plan of the employer, compliance coordination is not an issue.

The vendors sponsors must consider include:

• Providers approved after January 1, 2009, and those deselected after January 1, 2009;
• Providers deselected between 2005 and 2008 - the sponsor must make good faith effort to coordinate compliance, but the provider can opt out and either stop loans and hardships or keep up with coordination themselves; and
• Additional providers permitted to receive exchanges after 2007 with an information sharing agreement (ISA).

Providers deselected prior to 2005 are out of the plan for non-ERISA plans, unless both the sponsor and provider agree to bring them into the plan.

The written plan must specify how coordination will be done, and can include external procedures or documents by reference, Turner said.

Sponsors can choose between a centralized or decentralized approach to coordination (see 403(b): Centralized Versus Decentralized Administration ). Turner explained that with a centralized approach, the sponsor must decide who performs the function of coordination, the sponsor, a vendor, or a TPA.

There can also be a push or pull on data - is information pushed out from vendors into a centralized database to allow it to be aggregated or evaluated for loans and distributions, or does the administrator request information from providers when a request is received.

In a decentralized environment, providers are required to confirm data with each other before processing loans and distributions

The decision between centralized or decentralized administration should be made based on volume and complexity of plan transactions, and cost in relation to compliance needs. Either solution must include grandfathered accounts and other plans of the employer, Turner noted.

For the written plan, which must be in place by December 31, 2010, sponsors still have the option of a single document or a "paper clip" approach with a central document and attached provider contracts. Public colleges and universities using a 403(b) as a supplemental plan may use the paper clip approach because of additional state regulations for plans, Turner said. If using separate documents to comprise a plan, Turner suggested sponsors have a list of what documents are included and what requirements are satisfied by each

If an employer sponsors multiple 403(b) plans, a document must be in place for each, and if there is already a document in place, the sponsor should make sure all final regulations are included, or amend. Plans can be consolidated into one.

The plan must be communicated to participants, and should be communicated to investment providers and service providers to ensure coordination of loans and withdrawals.

If a sponsor finds operational defects in its plan, existing guidance from the IRS says if there are procedures in place showing an intent to comply, the sponsor can self-correct and get IRS approval of the correction for a fee. If the defect is discovered within two years and is insignificant, the defect can still be self-corrected in many cases, according to Turner. However, the sponsor must go to the IRS first if defects are discovered after two years.

If defects are found during an IRS audit, the same rules apply, Turner said.

Finally, Turner noted that plan termination is a new provision in the regulations, and is a distributable event. All participant accounts must be distributed upon plan termination and no contributions can be made to any 403(b) plan for one year after.

The one-year period starts after the last participant account or contract is distributed. However, Turner warned, this could cause a problem because under some annuity contracts and custodial accounts, the employer does not have authority to force distribution of participant accounts

Turner assured sponsors that complying with 403(b) requirements does not subject public employers to Title I of ERISA, and many states specifically insulate public K-12 schools from any fiduciary liability. ERISA rules will not override state statutes for public employers

A replay of the Webcast is available at www.valic.com/webcasts .