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Internal Revenue Code Section 403(b) Plans
By Joe Rankin & Bruce Delbecq
Employee Benefits Alert, November 2005
Requirement
Tax-exempt employers and public schools typically use 403(b) plans to allow employees to save on a pre-tax basis for retirement and to accept employer retirement contributions. In December 2004, the IRS issued comprehensive proposed regulations that will potentially impose several responsibilities on sponsors of these arrangements that were not previously required.
Description
The regulations are far reaching, requiring a written plan document and that plans be administered in accordance with the terms of the document, which will impose ultimate administrative oversight on the employer.
In addition, the regulations provide:
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That the universal availability rule applies so that generally, all employees must be eligible to make salary reduction contributions. An important exception: For part-time employees, the regulations utilize a "1,000 hour" per year eligibility guideline for determining which employees are considered part-time and can be permissibly excluded from coverage.
- For the formal elimination of the ability of employees to transfer account balances to vendors that do not have payroll slots, without employer approval.
Action
What should employers do now to remain in compliance? Although the proposed regulations state that they can’t be relied upon until they’re issued in final form, it’s anticipated that final regulations will be issued during 2006, with a likely effective date during 2007.
Employers should now begin considering how the proposed changes will affect plan design and administrative procedures, including plan sponsorship and maintaining a plan document. Plan sponsors should consider the following items immediately:
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The ordering of catch-up contributions: If a participant is eligible for the traditional 15 years of service catch-up, then it will be considered used first before the age 50 catch-up when participants contribute more than the basic limit, $14,000 in 2005.
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Effective February 14, 2005 no new life insurance contracts can be part of a 403(b) account.
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