In fact, there are unique twists to 403(b) plans, based on differences found in the Internal Revenue Code and IRS guidance. As a best practice, take some time to re-read your plan document as routine maintenance to be sure you are not laboring under one of the common 403(b) plan “myths.”
Myth 1: A 403(b) sponsor can currently adopt a prototype plan document.
At the current time, there is still no program in place that enables vendors to submit a 403(b) prototype plan document to the IRS to obtain approval that the prototype document, as a matter of form, meets the criteria of the 403(b) regulations.
The IRS has indicated that this is a high priority and the development of a procedure outlining the rules for a prototype program for 403(b) plans does appear as an item in the IRS’ 2010-2011 Priority Guidance Plan. However, this is a “coming attraction”— the IRS does not currently have an estimated release date for this guidance.
So, what exactly does a public school or 501(c)(3) organization currently have if it adopted a plan document from a vendor? Technically, that document is considered a “specimen” plan. That does not mean an employer is foreclosed from adopting a 403(b) prototype plan document in the future when the IRS rolls out its program and approves vendors’ submissions as prototype plan documents. According to the IRS, an employer with a 403(b) plan can restate its current plan document to a vendor’s approved prototype retroactively to a January 1, 2010, date. The employer can then rely on that prototype plan document meeting the requirements of the 403(b) regulations as of that effective date until the next IRS remedial amendment period requires another update of the plan document.
Myth 2: A 403(b) plan must include all IRS permitted features.
The IRS regulations provide that certain elements must be written into a 403(b) plan document — namely, material terms and conditions for eligibility, benefits, applicable Internal Revenue Code limitations, contracts available under the 403(b) plan, and the time and form of benefit distributions. Any other features permitted by IRS rules (such as allowing rollovers into the plan, catch-up contributions, Roth 403(b) contributions, loans or hardships) are strictly optional and the employer can decide which ones it would like to include or omit when developing its plan document.
For example, the IRS regulations permit an individual with an account at one employer’s 403(b) plan to transfer those savings to another 403(b) plan in which that participant has an account. However, just because the regulations allow a plan to add that functionality, it does not mean your plan must offer it. (In fact, you may decide it is administratively simpler, as a matter of plan design, to allow these participants instead to consolidate their 403(b) accounts via rollovers to the 403(b) plan they designate. When rolled over, these amounts lose certain attributes — including whether they are from employee or employer contribution sources, subject to spousal consent, and the like. A transfer among 403(b) plans, on the other hand, requires the receiving plan to preserve these characteristics, which could potentially lead to greater operational challenges.)Bottom line, review the day-to-day administration of your 403(b) plan to make sure that plan operation — including all optional features — matches the terms of your plan document.
Myth 3: A 403(b) plan can limit participation if a participant has not yet satisfied minimum age/service requirements.
A 401(k) plan can impose minimum age and service requirements that an employee must satisfy in order to be eligible to make deferrals to that plan.
That is not the case with a 403(b) plan. While a 403(b) plan can exclude certain classifications of employees, conditioning deferrals based on reaching a minimum age or performing a period of service for the employer is not permissible. (Those would be acceptable criteria, however, for conditioning the right to receive employer contributions under a 403(b) plan). Rather, the only categories of employees that may be excluded, as a matter of plan design, are nonresident aliens with no U.S. source income; certain student-employees; individuals who can defer to another 403(b), 401(k), or governmental 457(b) plan of that employer; or employees who normally work less than 20 hours per year.
Myth 4: The order of available catch-up contributions does not matter.
The IRS rules provide for a specific hierarchy for those longer service employees who are able to use both the 15 years of service catch-up and the age 50+ catch-up in the same tax year. The 403(b) regulations confirmed that the first to be used is the 15 years of service catch-up. Only after the amount available under that catch-up is satisfied can additional deferrals be made under the age 50+ catch-up.
Myth 5: All contracts under the 403(b) plan require money-out authorization.
Remember that the IRS rules seeking a sponsor (or the sponsor’s delegate) to sign off on requested disbursements apply only to those contracts that are under the 403(b) plan when the regulations became effective in 2009. Transactions involving contracts that have not received any amounts since December 31, 2004, are grandfathered from the current IRS rules and thus are not considered to be under the 403(b) plan. And there is only the need for a good faith effort at information sharing between the employer and the vendor whose contracts were deselected from the plan between 2005 and 2008.
Being able to separate myth from fact is always a good skill. Applying that skill to your 403(b) plan helps avoid unnecessary administrative or plan design changes, while keeping your 403(b) plan document compliant with the IRS requirements.
Linda Segal Blinn, J.D., is Vice President of Technical Services for ING U.S. Retirement Services. In this capacity, Blinn supervises the provision of legislative, regulatory, and compliance information to assist employers in operating their retirement plans. A contributing author to several publications, Blinn also speaks frequently at industry associations meetings on retirement plan issues facing K-12 schools, higher educational institutions and nonprofit entities.
(This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax adviser.)