Final Code Section 403(b) regulations

As announced in the last edition of re:source, the final 403(b) regulations have been released with a general effective date of January 1, 2009. Although the final regulations are substantially the same as the proposed regulations, the new regulations also raise some significant questions. Industry groups are currently pressing the IRS for changes and clarifications to certain provisions within these new regulations. Some of the information discussed below could change as further clarifications are received. GuideStone is committed to providing you current, accurate information. We will gladly receive any inquiries you have concerning these changes and their impact on your GuideStone retirement plan.

Major Provisions

Written-Plan Requirement — The new written-plan requirement was included in the proposed regulations; however, the final regulations expand the provisions that are required to be included in the plan. For instance, the final regulations provide that allocation of responsibility for compliance with the regulations must be spelled out specifically in the plan and the regulations explicitly provide that such responsibility cannot be allocated to participants. In general, this provision is aimed at employers with multiple vendors because, in the IRS’s view, where multiple vendors exist, there might well be violations of loan-limit and hardship-distribution restrictions.

Reflection: This may mean that employers are required to approve certain participant transactions, such as hardship distributions and loans, to ensure requirements are met across vendors. Where GuideStone is the single-vendor solution, we can monitor the employer’s plan for compliance with loan- and hardship-distribution requirements.

Contract Exchanges and Plan-to-Plan Transfers — While the proposed regulations indicated that there would be changes made to what were formerly known as 90-24 transfers; the final regulations added an unexpected new requirement. The final regulations continue to allow these non-taxable exchanges or transfers between 403(b) accounts; however, for what is now called “contract exchanges” within the same plan, there is a new requirement that the employer and the vendor of the receiving 403(b) contract enter into an agreement to exchange information.* In addition, what is now known as “plan-to-plan” transfers can only occur between an employee’s current and former employer. In other words, exchanges and transfers will no longer be allowed to vendors with whom an employer has no relationship.

The IRS is currently saying that all transfers made after September 24, 2007, could be subject to this rule. Further clarification on this point is currently being sought from the IRS.

Reflection: GuideStone is in the process of revising forms and creating an agreement to share information with employers. Employers may want to stay abreast of how this new requirement impacts their 403(b) plan.

* See the article Final 403(b) Regulations Regarding Transfers between 403(b) Plan Providers for more information.

Timing of In-Service Distributions from Employer Contribution Accounts — As provided in the proposed regulations, the final regulations impose new in-service distribution restrictions on employer contributions. Under the final regulations, distributions from employer contribution accounts cannot occur (1) prior to completion of a fixed number of years of service, (2) prior to attainment of a stated age or (3) upon the occurrence of a stated event, such as the purchase of a home.

Reflection: Currently most 403(b)(9) retirement plans restrict distribution of employer contribution accounts until termination, so this is not likely to have much impact on GuideStone clients. However, the 403(b)(9) retirement plan and Adoption Agreement will be updated to provide for these three distribution options.

New Definition of Severance from Employment — Under the final regulations, a severance from employment for purposes of a distribution from a 403(b) plan occurs when an employee is no longer employed by the 501(c)(3) employer maintaining the 403(b) plan. For example, if an employee transfers from a 501(c)(3) employer to a for-profit subsidiary that has its board of directors controlled by the 501(c)(3) employer, that employee can be considered to have a severance from employment, even though the two employers would be considered a single employer for other purposes such as loans.

Reflection: An employer’s plan can apply more restrictive distribution requirements than those imposed by the regulations. For instance, an employer’s plan can provide that distributions are not available until an employee has terminated from all “related” employers.

Universal Availability — For 403(b) plans subject to retirement-plan nondiscrimination testing, such as 403(b) plans of colleges, universities and hospitals, the final regulations continue to require that if any employee is allowed to make elective deferrals, all employees of the employer must be allowed to make elective deferrals, with certain exceptions. This requirement is known as “universal availability.” The final regulations clarify one of the groups of employees that can be excluded from the universal availability requirement, that is, “employees who normally work fewer than 20 hours per week.”

Under the final regulations, an employee normally works fewer than 20 hours per week if:

• At the employee’s hire date, the employer “reasonably expects” the employee to work less than 1,000 hours by his or her one-year anniversary; and
• For each plan year (or subsequent 12-month period, if provided in the plan) ending after the employee’s one-year anniversary, the employee actually worked fewer than 1,000 hours in the preceding 12-month period.

Reflection: It appears that once an employee works 1,000 or more hours in a year, that employee is in the plan. However, GuideStone and others are seeking clarification of this issue.

Effective Opportunity Required — As a part of satisfying the universal-availability requirement discussed above, an employer must demonstrate that employees are provided with “an effective opportunity” to make elective deferrals. The regulations state that the determination of whether an employer provides employees with an effective opportunity to make elective deferrals is based on all the relevant facts and circumstances. Some of the facts and circumstances looked at in determining whether employees have an effective opportunity to make elective deferrals are:

• Notice of the availability of making elective deferrals.
• The period of time during which an elective-deferral election may be made.
• Whether any other rights or benefits are conditioned on the employee making elective deferrals.

Reflection: Prior to the issuance of the final regulations, IRS officials repeatedly stated that the one thing they didn’t want to hear when auditing an employer is that employees are only told about the ability to make elective deferrals if they happened to stop by the human resources department and ask. These officials indicated they will ask to see payroll stuffers, posters and emails in order to determine whether an employer has let employees know they have the ability to make elective deferrals. GuideStone can help provide employers with communications pieces to help an employer provide an effective opportunity to its employees to make elective deferrals.

Requirement to Follow Plan Terms — One small but significant provision of the written-plan requirement contained in the final regulations is the obligation that the plan be maintained “in form and operation.” This means that not only must the plan contain all the right provisions, but the terms of the plan must also be followed. These regulations emphasize that a failure to follow the terms of an employer’s plan is an “operational failure” that adversely affects all of the 403(b) accounts with the employer of the affected employee(s).

Reflection: Once the final regulations are effective, January 1, 2009, it may be more difficult to correct situations where the plan is not operated in accordance with the terms of the plan. It is anticipated, however, that the IRS Employee Plans Compliance Resolution System (EPCRS) will be updated to provide for correction of a failure to follow the terms of a 403(b) plan. Any correction method provided in EPCRS will include specific requirements regarding its use.

GuideStone Is the Church Plan Expert — The IRS is currently conducting seminars around the country related to the final 403(b) regulations. GuideStone will attend many of those IRS seminars and work with others in the industry to gain a better understanding of the impact of these new regulations on our clients. We are as committed as ever to providing our clients with compliant plan documents and timely information concerning compliance with the final regulations.

You may hear from other 403(b) providers that they can provide you with a single-vendor solution for your 403(b) plan compliance issues. Before you consider another vendor, consider this: Most of those vendors are not focused on the way the final 403(b) regulations impact church plans. As a leading provider of church 403(b) plans, GuideStone is keenly focused on that issue.

Look to future issues of re:source for more information about the final 403(b) regulations. Contact your relationship manager with any questions you have about the final regulations and how they may impact your 403(b) plan. Remember, GuideStone has a dedicated team with years of experience related to church plans, and our focus is on serving you.