For the first time in 40 years, the IRS has published comprehensive 403(b) guidance in the form of final regulations. The regulations may require much more organizational involvement than was necessary in the past. The regulations also require a written plan and generally place the burden on the organization to make sure that the plan is administered in accordance with the terms of what will become, for some organizations, their first 403(b) plan document. The regulations generally follow the proposed regulations with some important differences.

A delayed effective date of January 1, 2009 has generally been established to have a written plan document and necessary policies and procedures in place. In addition, the IRS has begun inquiries as to whether organizations are satisfying the 403(b) universal availability rule. Therefore, if all employees of your organization do not have the opportunity to make elective deferrals by salary reduction to your 403(b), now is the time to carefully analyze the excluded employees for compliance with the existing rules and the tighter new rules.

The IRS has announced an earlier deadline for contract exchanges which may require immediate action. Any contract exchange (transfer of funds by a participant from one investment provider to another) after September 24, 2007 will require that the organization and the provider enter into an "information sharing agreement." An information sharing agreement is a new requirement designed to facilitate compliance with the new rules. It is expected to provide for sharing of information like contributions amounts, loans, distributions, date of birth, date of hire, social security information, etc., that will allow both parties to fulfill their duties.

The issue is — if there is an exchange after September 24, 2007, and the organization and the provider ultimately are unable for technology, economic or other business reasons to come to an understanding that includes an information sharing agreement by January 1, 2009, then the participant's contract would not qualify under 403(b) and could become taxable.

If your 403(b) plan has only one investment and administrative provider, it is possible that "exchanges" may not even be permitted by your plan document, and no immediate action would be necessary. However, if your 403(b) plan utilizes multiple investment and administrative providers, action is likely required.

Deadlines for Deferred Compensation and Section 409A Compliance

The Treasury Department and the Internal Revenue Service (IRS) announced that taxpayers will have until December 31, 2008, to bring documents into compliance with the final nonqualified deferred compensation regulations under section 409A of the Internal Revenue Code. In April, Treasury and IRS issued final 409A regulations, which provided guidance regarding the requirements for deferral elections and payment timing under section 409A. Affected plans and arrangements were required to comply with the final regulations by December 31, 2007. IRS Notice 2007-78 extends the document compliance deadline for one year and provides additional limited transition relief, but does not extend the January 1, 2008, effective date of the final regulations. The Notice also announces that Treasury and the IRS anticipate issuing guidance containing a limited voluntary compliance program that will permit corrections of certain unintentional operational violations of section 409A.

In 2004, the IRS launched the Executive Compensation Compliance Initiative to study how organizations establish and report executive compensation. Earlier in the year, they released the preliminary results of the project.

Back in 2002, Steven T. Miller, then IRS Director Exempt Organizations, provided a summary and handy checklist for ensuring that organizations met the requirements of the rebuttable presumption of reasonableness in setting executive compensation.