Now we take a look at a few of the key requirements.
The regulations in essence require plan sponsors (other than church plans, unless the plan is funded with retirement income accounts) to put the terms of their plans into writing.
The regulations do not require a single centralized plan document, though some plan sponsors may find that to be the simplest approach. A collection of documents will suffice, if those documents taken together address all of the requisite elements (eligibility, benefits, limitations, available investment arrangements, distribution rules and availability) plus any elective elements.
Many 403(b) plans will use this “collection of documents” approach, for various reasons:
- Public employer plans may consist in whole or part of state statutes, regulations, or rules.
- Many 403(b) plans will incorporate administrative procedures by reference, to make it easier to modify those procedures in the future without amending the plan.
- Many 403(b) plans will also incorporate varying provisions from the underlying investment arrangements, such as loans and distribution options. Note: differences among the investment arrangements are OK, as long as the provisions are consistent with the Code, the regulations, and the written plan.
Written plans for ERISA 403(b) plans are more likely to gravitate toward the centralized document approach.
The plan sponsor’s choices may be limited by other factors. For example:
- They may be limited by employee collective bargaining.
- The application of new rules that are more restrictive may be limited with respect to existing account balances, either by the terms of the plan or of an investment arrangement.
- Inclusion of employer discretion, such as over approval of loans or hardship withdrawals, may not be an option for a plan designed to qualify for ERISA safe harbor status.
This written plan requirement applies to each 403(b) plan the employer sponsors. Some employers may decide to merge multiple 403(b) plans, for purposes of efficiency, while others will continue to maintain separate plans.
Eligibility and Nondiscrimination
The plan-wide consequences of failing one or more of these tests can be drastic, so plan design and procedures are important.
For elective deferrals, “universal availability” rules apply to all plans other than those sponsored by “steeple” churches (including synagogues, mosques, etc…); that includes both public and private employers. For other contributions, non-discrimination rules apply only to plans of private tax-exempt employers other than "steeple" churches.
Also make sure you know what you want to accomplish. Opening deferrals to everyone can avoid problems, but may result in administrative challenges. But, if including everyone meets your goals and does not impose significant administrative burdens, why not?
Be consistent - an exclusion inconsistently applied can be an exclusion forfeited, and communicate - let eligible employees know about the plan and how they can participate.
Choosing Permitted Investments
You are in control. However, be aware of any limitations under state laws, collective bargaining agreements, and the terms and duration of existing contractual arrangements.
You can set the number of providers, but public employers that decide to have a single provider may want to have their counsel determine whether state fiduciary standards, which might not have applied to the plan otherwise, may govern those specific activities.
There is no magic number of providers in the regulations. An employer’s decision may be one of balancing participant choice and administrative realities. For many employers this has meant selecting a more manageable number, perhaps as few as three and no more than five.However, if you deselect a provider today, it remains in the plan as a frozen provider, as long as it still holds any plan accounts for your plan’s participants. The deselected provider also needs to continue to work with you to coordinate compliance, although there will likely be limits on your ability to unilaterally impose new requirements.
Setting the Rules of the Road
This is your plan. You decide what is permitted, and what is not. If your plan says loans are not permitted, then they are not permitted. If you allow loans subject to availability under the investment arrangement, let your providers and employees know that.
Compliance considerations should be an important factor –not just the primary driver. What is most important is knowing whether the plan design accomplishes its purpose, and encourages employees to save for retirement. For example, does prohibiting loans discourage employees from participating?
A central message of the 403(b) regulations was the need to coordinate certain plan transactions as loans and hardships across providers in multiple-providers. Plan sponsors will continue to see challenges in balancing this with plan design as they choose between centralized versus decentralized compliance coordination.
If coordination is centralized by the plan sponsor, a lead provider, or a third party, each of these choices has material cost implications that must be evaluated alongside any expected benefits. Moreover, the costs themselves can vary, with some service providers including additional services unrelated to compliance, such as common remittance of contributions; and some service providers (including third parties) charging fees to all participants (both actively contributing and inactive), others charging fees only to active participants, and some investment providers charging limited or no additional fees for compliance coordination services.
This is not an all-inclusive list of 403(b) requirements; however, it provides a useful starting point for employers taking a closer look at their plans, either for the first time or to re-evaluate previous decisions made to meet 403(b) regulation deadlines in 2009.
Richard Turner serves as Vice President and Deputy General Counsel for VALIC. Turner has worked extensively with retirement plans and products for 25 years and is a frequent speaker on the topic. He is also a contributing author of the “403(b) Answer Book.”
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.