IRS' Architect Dispels Myths about 403(b) Regs

Speaking at the 403(b) Symposium in Boston sponsored by PLANSPONSOR and Cammack LaRhette Consulting, Robert J. (Bob) Architect, Senior Tax Law Specialist, Employee Plans, Internal Revenue Service, provided some peace of mind to sponsors coming up on the January 1, 2009 compliance deadline.

Information Sharing

The biggest sigh of relief came after Architect’s response to those who think that if they do not have an information sharing agreement (ISA) in place with every vendor under the 403(b) plan by 1/1/2009, they will fall out of compliance. Architect told Symposium attendees that the regulations do not say that ISAs have to be in place by January 1.

Further, Architect pointed out, Chapter 10 of the new regulations, which replaces Revenue Ruling 90-24 on contract exchanges, says unless there will be new service contract exchanges between approved vendors and non-approved vendors going forward, sponsors will not need ISAs with the non-approved vendors. In addition, Chapter 3 of the new regulations says the plan sponsor and vendor may assign responsibility for monitoring 403(b) transactions and does not require a formal ISA, according to Architect.

All this is very good news to those sponsors worried that a vendor that will no longer be used going forward will not sign an ISA.

Architect also dispelled the myth that if a participant does not transfer assets to those vendors that are approved for the plan going forward, their assets will become taxable, saying the regulations do not say that.   Restrictions on contract exchanges also do not equal restrictions on rollovers where a participant has attained a distributable event (i.e. severance, retirement, or age 59 ½).

No Getting Out of It

Architect wanted K-12 sponsors to know that they should not fear falling under governance of the Employee Retirement Income Security Act (ERISA) no matter what decisions they make for their plans going forward. “Public entities, no mater what choices they make, have no ERISA obligation,” he said.

However, Architect warned there are some rumors plan sponsors should not pay attention to. A 403(b) plan that will no longer include employer contributions, but is not terminated, still needs a written plan document in place by January 1, 2009. Likewise, venues that have collective bargaining agreements (CBAs) in place and churches do not have a delayed effective date, unless the 403(b) is part of a CBA or the plan is subject to action by a church convention.

Architect also wanted sponsors to know before they decide to terminate their 403(b) plans, that termination is “subject to individual agreements,” and sponsors should make sure they can force out funds.   Chapter 10 of the regulations lays out the tax consequences of termination and dictates that assets must be distributed.

In addition, Architect gave a heads up to sponsors of an organization that has related entities to pay attention to guidance on controlled groups, which affect dollar limitations on contributions and plan discrimination requirements. Most important is the determination of who is the employer in controlled group situations.

Attendees of the 403(b) Symposium were reminded that the IRS is developing a pre-approved plan document program for 403(b)s (See IRS Developing Pre-approved Plan Program for 403(b)s ).   While this does not delay the effective date for the written plan document to be in place, Architect said as part of the program the IRS is developing a listing of required modifications (LRM) which will close the gaps in model plan language already provided by the Service, and it hopes to have a suggested listing on its Web site ( www.irs.gov/ep ) by the end of October.

The listing will include language on employee contribution formulas and Roth contributions.

Architect stressed that the written plan document sponsors must be formally adopted prior to January 1, 2009 - meaning sponsors should take the necessary actions for legal adoption required by their organizations' bylaws.