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


IRS spokespersons said that transfer would be deemed to be completed if ... June 21, 2007 the IRS announced they are expanding an outreach effort to ensure ... – PowerPoint PPT presentation

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

The Final 403(b) Regulations What Do They Mean
to You?
  • October 4, 2007

David Blask Senior Pension Consultant (800)
242-1421 ext. 4599
  • Final 403(b) Regulations
  • Plan (Document)
  • Transfers
  • Prompt Deposit of Contributions Rule
  • Optional Features
  • IRS audits
  • Universal Eligibility
  • Loans/Hardships
  • Action Items

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

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

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
  • IRS will issue sample plan language (as will
    ASBO, we have heard)

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
  • Only available after the employee experiences a
    distributable event such as severance from
    service or age 59 ½.

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

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

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

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

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.

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

Final Regulations Universal Eligibility
  • Effective opportunity needed to satisfy universal
  • 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

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
  • Not many will contribute should not increase
    administrative burden

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.

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

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
  • 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.

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

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
  • 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.

Final 403(b) Regulations Optional Features
  • Employers plan can choose to allow
  • Hardship withdrawals
  • Loans
  • Exchanges to approved products
  • Rollovers

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)

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

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!

Final 403(b) Regulations Hardship Withdrawals
  • A distribution is deemed necessary to satisfy an
    immediate and heavy financial need of an employee
  • The employee is prohibited, from making elective
    contributions for at least 6 months after receipt
    of the hardship distribution.

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

  • 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

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

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

Action Items
  • What Actions Should you Take Now
  • Consider obtaining information sharing agreements
    ASAP so employees can continue to make in-service
  • 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

David Blask Senior Pension Consultant (800)
242-1421 ext. 4599
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