New Proposed Regulations Bring 403(b) Requirements Closer to Those of 401(k) Plans
Not-For-Profit Advisor , 2005 Summer
In the last NFP Advisor, we talked about the IRS proposed regulations for 403(b) plans. As discussed, these proposed regulations will require much more involvement for employers than was historically necessary. The regulations require a written plan and generally place the burden on the employer to make sure that the plan is administered according to the terms of what will become, for many not-for- profit organizations, their first 403(b) plan document.
As pointed out in the last article, most plans are likely to incur major changes. Thus, this may be the ideal time to re-evaluate your retirement program design and the practicality of your administrative approach.
The last issue of the NFP Advisor featured some of these proposed regulations, including requirement of written plans, universal availability rule, traditional catch up rule, and contributions related to terminated employees. Here are the rest of the proposed regulations.
Contribution Non-discrimination Testing. The regulations discard the “temporary” safe harbor nondiscrimination rules that were provided in IRS Notice 89-23 and, instead, apply the general qualified plan nondiscrimination rules to employer contributions made to 403(b) plans. Generally, the new nondiscrimination rules will be more rigorous and provide less flexibility.
Roth 403(b). Beginning in 2006, 401(k) and 403(b) plans may offer Roth contribution treatment. Similar to the Roth IRA, contributions will be made after-tax, and distributions will be tax free if certain requirements are met.
Elimination of Life Insurance Investment. After February 14, 2005 , the regulations eliminate standalone incidental life insurance as a permitted plan component. It is possible that providers may develop products that contain enhanced death benefit features within an annuity contract format. Certain existing life insurance contracts are grandfathered.
Transfers of Assets Between 403(b) Vendors. In the past, 403(b) vendors and employers frequently disagreed over the authority of the employer to move 403(b) assets to another vendor. Vendors often have taken the position that only employees can authorize such a transfer. The regulations make it clear that the employer may transfer funds without employee consent. Further, employee initiated transfers may occur only among employer authorized contracts and agreements.
Distribution Events Are Liberalized. Distributions are available upon a severance from employment with the entity sponsoring the 403(b). Therefore, an employee who moves from the not-for-profit hospital to a controlled for-profit physician practice, is deemed to have a severance from employment, and is eligible to receive a distribution, if the written plan so allows.
The Board Control Test is Formally Adopted. The IRS has confirmed past informal guidance by indicating that 80 percent-or-greater board overlap would cause two entities to be considered a single entity for plan contribution and non-discrimination testing purposes.
403(b) Plan Termination. Historically, employers found it difficult to terminate their 403(b) arrangements, because 403(b) vendors held that employees owned their accounts, therefore, the primary relationship between vendor and employee had to continue. The regulations state that an employer in its written plan may permit termination of the 403(b) plan and the distribution of assets to the employees. At this point, it is uncertain how contract investment penalties and fees would be handled.
