The Final 403b Regulations: What Do They Mean to You

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The Final 403(b) Regulations What Do They Mean
to You?

• October 4, 2007

2004 PRESIDENTS CLUB
David Blask Senior Pension Consultant (800)
242-1421 ext. 4599
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Agenda

• Final 403(b) Regulations
• Plan (Document)
• Transfers
• Prompt Deposit of Contributions Rule
• Optional Features
• IRS audits
• Universal Eligibility
• Loans/Hardships
• Action Items

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Finally, Theyre Here

• July 23, IRS issued Final 403(b) Regulations
• Published Date July 26, 2007
• Applicability Date Years beginning after
  December 31, 2008
• Some exceptions

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Changes for Employers

• More contact with product providers to coordinate
  responsibilities
• Annual notice requirements
• Communicating the plan to employees
• Evaluating product provider performance under the
  plan
• Determine partner relationships for compliance
  purposes

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Plan (Document) Required

• Written Plan (Document) required
• Lack of plan (document) beginning in 2009 will
  disqualify entire plan
• Plan is permitted to allocate responsibility for
  some functions to employer or others i.e.
  delegate some responsibilities to vendors, not to
  employees
• IRS will issue sample plan language (as will
  ASBO, we have heard)

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Transfers and Exchanges

• Lesson on New Terminology After 9/24/07
• Transfer is moving a 403(b) account under one
  employers plan into investment products
  permitted under another employers 403(b) plan
• Exchange is change of investment products among
  investment options under the current employers
  403(b) plan
• Rollover is removal of account from employers
  403(b) plan into any other eligible retirement
  plan
• Only available after the employee experiences a
  distributable event such as severance from
  service or age 59 ½.

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Transfers Taking Place By September 24, 2007

• Employee initiated transfers under Rev. Rul.
  90-24 are permitted until September 24, 2007
• Current rules continue for 60 days from
  publication date
• IRS spokespersons said that transfer would be
  deemed to be completed if necessary paperwork was
  completed even if the transfer check is not
  issued by 9/24/07
• Employers need not be involved in these
  transactions

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Transfers and Exchanges Between 9/25/07 and 1/1/09

• Permitted only if employer and vendor receiving
  the proceeds from another vendor enter into an
  information sharing agreement and
• The written plan document must include provisions
  that ratify the exchanges that occurred during
  the interim and permit exchanges and/or transfers
• Both these actions must be completed by January
  1, 2009

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New Exchange Rules

• Employers plan document would have to permit
  exchanges, and to be a tax free exchange
• The value of the accumulated benefit is not
  less after the transfer
• Contract charges are permitted. Special transfer
  fees are not.
• The receiving contract has distribution
  restrictions at least as restrictive as the
  sending contract
• same as old rules
• Employer and receiving vendor have an information
  sharing agreement for compliance purposes

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After December 31, 2008

• No transfers or exchanges unless permitted by the
  plan document
• Exchanges restricted to only those products named
  in employers plan document
• No transfers outside of authorized products
  during employment
• Plan could authorize different vendors for
  exchanges than for payroll access
• After employment, employees could transfer to
  another employers 403(b) plan if both plans
  permit

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Transfers More Details

• Exchanges processed after September 24, 2007 are
  subject to the new restrictions, including a
  requirement that the receiving provider must have
  in place an agreement with the employer to
  exchange compliance related information.
• The agreement to exchange compliance information
  must be operative no later than January 1, 2009,
  and must be retroactive to include any 90-24
  transfers processed after September 24, 2007.

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Risk of Improper Exchanges

• Any participant initiating a 90-24 transfer after
  September 24, 2007, will do so at their own risk
  of exposure to the requirement that their
  employer and receiving provider will establish
  such an agreement by January 1, 2009.
• In the event that a 90-24 is processed after
  September 24, 2007 and no agreement is in place
  by January 1, 2009 between the receiving provider
  and the employer, that participants account and
  all 403(b) accounts maintained by the participant
  with their employer may be disqualified under the
  403(b) regulations and subject to applicable
  taxes.

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Final Regulations Universal Eligibility

• Effective opportunity needed to satisfy universal
  availability
• Meaningful notice - annually
• Who can be excluded?
• Employees eligible under other deferral plans
• Non-resident aliens
• Students
• Those who normally work less than 20 hours per
  week

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The Problem as Reported by the IRS?

• Certain classes of employees are being excluded
  (e.g., substitute teachers, part time employees)
• Best to include all common law employees (some
  employees in an excluded class may normally
  work 20 or more hours per week a non-excludable
  group)
• Not many will contribute should not increase
  administrative burden

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Universal Eligibility

• Universal Eligibility compliance project (letter
  and questionnaire) being expanded
• June 21, 2007   the IRS announced they are
  expanding an outreach effort to ensure that
  public schools throughout the United States are
  complying with the universal availability
  requirement for 403(b)s.
• To assess the level of compliance, the IRSs
  Employee Plans Compliance Unit (EPCU), has
  started sending questionnaires to public school
  districts in all 50 states under the auspices of
  the 403(b) Universal Availability project.

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Universal Eligibility

• Caution virtually all employees must be
  permitted to make salary reduction contributions
  to the 403(b) plan if they will contribute more
  than 200 per year
• And, public educational employers must
  communicate availability to employees

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Final Regulations Provide Alternative to
Administering the 20-hour Rule

• CAUTION Only use this rule if you are willing to
  track every employees hours to prevent any
  employee who works less than 1000 hours from
  joining
• On date of hire, must reasonably expect employee
  to work
• AND
• For every subsequent plan year or 12-month period
  the employee actually worked preceding 12-month period.

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Prompt Deposit of Contributions Rule

• Contribution amounts must be transferred to
  providers within a period no longer than is
  reasonable for proper plan administration.
• Example Transferring elective deferrals within
  15 business days following the month in which
  these amounts would have been paid to the
  participant.

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Final Regulations Other Provisions

• Rollover to IRA or other eligible retirement
  plans not affected by rules.
• 403(b) plans must be universally available to
  employees including Roth contributions, if
  permitted.
• Life insurance, endorsement, health or accident,
  property, casualty or liability policies are
  prohibited as Section 403(b) funding vehicles.
  Annuities may include death benefits if permitted
  under the incidental benefit rule.

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Final 403(b) Regulations Optional Features

• Employers plan can choose to allow
• Hardship withdrawals
• Loans
• Exchanges to approved products
• Rollovers

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Final 403(b) Regulations Hardship Withdrawals

• Must follow same rules as in 401(k)
• Hardships only if BOTH
• The distribution is made on account of an
  immediate and heavy financial need of the
  employee and
• is necessary to satisfy the financial need.
• Hardship withdrawal limited to 12/31/88 balance
  contributions - previous hardship distributions
  (no earnings)

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Final 403(b) Regulations Hardship Withdrawals

• A distribution is deemed to be on account of an
  immediate and heavy financial need of the
  employee if for
• (1) Medical care
• (2) Purchase of a principal residence
• (3) Payment of post-secondary tuition, for the
  employee, or the employees spouse, children, or
  dependents

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Final 403(b) Regulations Hardship Withdrawals

• (4) Prevent the eviction of the employee from
  principal residence
• (5) Payments for burial or funeral expenses
• (6) Repair of damage to the employees
  principal residence.
• No Self-Certification!

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Final 403(b) Regulations Hardship Withdrawals

• A distribution is deemed necessary to satisfy an
  immediate and heavy financial need of an employee
  if
• The employee is prohibited, from making elective
  contributions for at least 6 months after receipt
  of the hardship distribution.

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Final 403(b) Regulations Hardship Withdrawals

• Issues responsibility for
• Calculating allowable hardship amount?
• Approving the hardship request
• Notifying payroll to stop contributions
• Monitoring six month clock to prevent restarting
  contributions

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Loans

• Limited to lesser of
• 50,000
• 365 day look back
• 50 of account balance
• Must include all loans in all plans of employer
  (e.g. 457(b) plan) and all vendors

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Loans

• Issues
• Vendor limitations
• Need simplified coordination
• Limit loans to once per quarter?
• TPA

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IRS Actively Auditing

• New focus on loans that exceed the limits
  (because of loans from either multiple vendors or
  from multiple plans such as 403(b) 457(b))
• New focus on hardship withdrawals not meeting
  requirements of the regulations

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Action Items

• What Actions Should you Take Now
• Consider obtaining information sharing agreements
  ASAP so employees can continue to make in-service
  exchanges
• Put employees on notice that the rules are
  changing and that transfers to non-approved
  products may result in adverse tax consequences
• Be sure that your plan is available to virtually
  all employees that you communicate availability

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Questions?
David Blask Senior Pension Consultant (800)
242-1421 ext. 4599 dblask_at_lincolninvestment.com