Operating under the 403(b) Regs – A Mid-year Checkpoint

July 7, 2009 (PLANSPONSOR (b)lines) - As we are midway through the first year of the IRS' 403(b) regulations, plan sponsors may want to step back and consider how their 403(b) plans are faring.

By now, employers, many for the first time, should have:

  • Identified the vendors authorized to receive ongoing contributions under the 403(b) plan;
  • Established information sharing arrangements with those vendors who are approved only to receive contract exchanges from other vendors under that plan; and
  • Decided on optional plan features (such as Roth 403(b) contributions, employer contributions, loans, hardships, rollovers in, plan-to-plan transfers, etc.) permitted under the plan.

If all these steps have been checked off of the to-do list and the adoption of a written plan is in the works by December 31, 2009, a school or 501(c)(3) organization has satisfied its regulatory obligations, right?

Possibly.   But some 403(b) sponsors have been so busy thinking about getting ready for Day 1 that they have not necessarily contemplated the action steps required to operate the plan under the regulatory requirements.

So, what should a 403(b) sponsor be thinking about at this point?  

Reminding Employees About the 403(b) Plan

The new IRS rules require that at least once a year an employer must notify employees who are eligible to contribute to the 403(b) plan, whether they are currently participating in the 403(b) or not, about the opportunity to do so and to provide information about how to make or change the rate of contributions to the plan.   The notice to eligible employees must be “meaningful” — a method likely to be received by the employee.   

You do not need to create these notices from scratch.   Vendors and third party administrators (TPAs) may have sample notices that an employer can adapt for their purposes.   The notice can be in written form (say, a payroll stuffer or part of the annual code of conduct) or electronically sent via email (if employees have access to email during the workday). However, posting a notice on a bulletin board or intranet site would not likely be considered meaningful as an employee’s attention would not be called to this notice.  

Be sure to save a list of those employees whom you have notified each year – you may need to produce it in the event of an IRS audit.

Contributing to the 403(b) Plan

Once an employee decides to participate in the 403(b) plan, she must complete a salary reduction agreement with the employer to contribute to one of the vendors authorized by the employer. If the employer does not already have its own salary reduction agreement for employees to complete, sample versions can be obtained from product vendors, TPAs, and service providers.  

Don’t forget that the salary reduction agreement should reflect your plan document provisions.   If your plan permits Roth 403(b) contributions, the salary reduction agreement should include this option.   Similarly, if participants can make 15-Years-of-Service and/or Age 50+ catch-ups, your plan’s procedures should accommodate these supplemental contributions.   Sample salary reduction agreements are available from service providers.

Unless the 403(b) plan was subject to the Employee Retirement Income Security Act of 1974 (ERISA), sponsors previously did not have guidance to indicate when contributions need to be sent to the investment providers.   However, the final 403(b) regulations now require, regardless of the 403(b) plan’s ERISA status, that contributions need to be sent to the vendors no longer “than is reasonable for the proper administration of the plan.”   According to the regulations, the plan may provide for a specified time period under which the amounts are sent to the carriers.

Providing Access to 403(b) Accounts

Whether your employees want to take a loan or access their accounts while in service or upon termination, sponsors will be more involved in authorizing the transaction. The preamble to the 403(b) regulations noted that employee self-certification to these withdrawals is generally inappropriate because the employee has an interest in the outcome.   An employer, on the other hand, is better positioned to ensure that the withdrawal satisfies the IRS and plan criteria.

If you have decided to administer your own plan, vendors can outline the steps for approving various disbursement requests - steps that the IRS could be looking for in the event of an audit.   Alternatively, you may choose to delegate the approval function to a TPA versed in the 403(b) requirements.  

Documenting Your Plan

Remember that by the end of 2009, the IRS will require your plan's rules of the road to be documented in writing, either as a formal plan document or by a "binder clip" approach incorporating all of your plan's relevant materials.   Your written plan should match operational activities throughout the past year.   Vendors, TPAs, industry associations, and the IRS (through its model plan provisions) all can provide sample plan documents for the employer's consideration.  

While employers sponsoring 403(b) plans will more actively play a "plan sponsor" role in keeping with the IRS rules, it is important for these sponsors to recognize that they do not need to go down this path alone.   Tools and educational materials are often available in sample form to help the employer jump start their 403(b) operational compliance.  

- Linda Segal Blinn, JD, Vice President of Technical Services,

(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.)