403(b) Plans and the New Rules — What Schools Should Be Doing To Comply  
School Advisor, 2008 Issue No. 1

While many Michigan school districts have begun taking steps toward ensuring the new rules are satisfied with respect to their 403(b) plans, many employers are finding themselves in a holding pattern, unsure of next steps to be taken. For some, following the guidance of vendors or other individuals has pushed them to begin drafting a 403(b) plan document. For others, it is currently a wait-and-see approach.

Although many school employers are eager to push forward with the drafting of 403(b) plan documents, it is likely that planning with respect to desired plan provisions, especially administrative procedures, has not occurred or been allocated sufficient attention. Since administering the plan in accordance with the terms of the plan document will be required under the new rules, it seems that a certain level of due diligence should occur prior to the actual drafting of a written plan document. Additionally, although recently released IRS guidance provided model plan language and other guidance relating to certain grandfathered contracts, it is likely that additional guidance will be issued by the Internal Revenue Service that could affect plan documentation.

So, What Should Schools Be Doing Now?

School officials should be considering the design and features of their 403(b) plan, and at the same time consider how they expect to divide plan administrative responsibilities between the district and vendors. Some districts may consider the use of a third-party administration firm to handle 403(b) administrative services, including functioning as a common remitter of funds to all vendors. Others may determine to use one of their current vendors to handle certain recordkeeping/remitter services, if available, while retaining the responsibility for coordinating administrative functions in-house. Finally, employers who have the expertise and manpower may chose to maintain greater responsibility with respect to administrative items, and rely less on vendors.

Schools should ensure that they are meeting the universal availability rule, which provides that salary deferral contributions must be offered, and publicized, to all employees, with limited exceptions. Many schools are finding that key administrative responsibility elements include ensuring that the contribution limits are adhered to and that distributions and plan loans are only made upon events allowed under the 403(b) rules. Generally, this process requires cooperation between the applicable parties and a clear division of responsibilities. Ultimately, the school district is the responsible party; therefore, merely delegating functions is not enough—districts must be comfortable that the party that agrees to perform delegated functions will do a good job, because the district is ultimately responsible for the proper administration of the plan.

After the above steps have been taken, a plan document should be drafted that reflects the plan design and features chosen by the district as well as the required 403(b) provisions. In addition, vendor service agreements should be drafted in order to describe the delegated administrative functions and to protect the district. This process should also help schools minimize the differences in provisions and procedures amongst vendors for administrative ease, as well as ensure that the 403(b) plan is administered in accordance with the terms of the plan documentation.

Exchanges

New rules relating to contract exchanges (transfers from one approved vendor under an organization’s 403(b) plan to another) were established effective September 24, 2007 by the final 403(b) regulations. The rules require that all contract exchanges be made pursuant to an information sharing agreement between the school district and vendor that is in place no later than December 31, 2008 to ensure sufficient information is obtained by each party in order to comply with the new rules. Prior to September 24, 2007, many school employers took action by suspending all contract exchanges via direct communication with their 403(b) vendors and participants. Other districts requested that each of their vendors sign a certification that they would enter into an information sharing agreement, or actually did enter into information sharing agreements with vendors, and required current vendors to only permit exchanges among those providers.

Any districts that have not taken action to account for the new exchange rules should do so immediately. Not complying with the rules could result in a determination that participants who have entered into contract exchanges after September 24, 2007 have contracts that do not qualify as tax-deferred 403(b) contracts, resulting in the contracts becoming taxable to the participant.

Most school districts are becoming more comfortable with the new rules, and the changes that will be required to comply. The next step is developing a compliance strategy and moving forward with an implementation plan.