IRS Issues Final Regulations Related to 403(b) Plans
Our goal is to highlight the major provisions of this legislation to educate you concerning the impact these regulations will have on you, your plan and your employees. For further information, sign up for our re:source e-newsletter, a quarterly publication just for plan sponsors.
It is important to note: Various kinds of employers use 403(b) retirement plans. Churches which do not have for-profit subsidiaries and use only GuideStone as their retirement plan provider will not be impacted by all of the changes listed below. For those churches, much of the new regulation requirements for monitoring distributions, hardship withdrawals and transfer can be assigned to GuideStone Financial Resources.
What Are the High Points?
Written Plan Requirement — The new regulations confirm that you need a written plan that meets certain legal standards. This can be fairly simple if you are partnered with one plan provider, like GuideStone, who has plan documentation expertise.
Some providers have been offering 403(b) retirement plan services to employers for years with no underlying written legal plan document. The new regulations will no longer allow this beginning in 2009. GuideStone is a church plan expert with more than 85 years of industry experience. We have worked for several decades with churches, church-related organizations and other employers to properly document their 403(b)(9) church retirement plans in writing.
A further complexity to this new requirement arises when an employer offers multiple plan providers in one retirement plan. In such a situation, the plan must be clearly written to spell out specific issues related to legal compliance, such as who will be responsible to ensure compliance with 403(b) rules related to loan limits, contribution limits and hardship withdrawals when a participant holds accounts with multiple providers. Neither the employer nor the plan provider can place that responsibility solely on the shoulders of the participant. So there’s a heightened level of responsibility for all parties to ensure compliance with the 403(b) regulations. Employers who have multi-provider arrangements may want to contact their GuideStone Relationship Manager to discuss the merits of using GuideStone as the sole provider of retirement plan services.
Contract Exchanges and Plan-to-Plan Transfers — Participants, employers and plan providers have more steps to complete when a participant wants to move or transfer money from one employer-sponsored provider to another. In the past, this sort of money transfer has been called a “90-24 transfer.” Effective Sept. 24, 2007, 90-24 transfers will no longer exist.
The new mechanisms for moving money in these multi-provider plan situations will be called “contract exchanges” or “plan-to-plan transfers.” Money can still be moved, but there is now a new wrinkle. To perform a contract exchange, the employer and the provider receiving the 403(b) money must enter into an agreement to exchange required information related to compliance with the 403(b) requirements. The other approach to moving money, a plan-to-plan transfer, occurs between two unrelated employers’ 403(b) plans. Consequently, these types of exchanges and transfers will no longer be allowed between providers with which an employer has no formal relationship. This particular provision takes effect on Sept. 25, 2007. This change presents some new accountabilities and challenges. For example, employers will need to establish information sharing agreements documenting responsibility for sharing information when participants move money within a single 403(b) plan from provider to provider. We anticipate that the IRS will release additional clarification to help employers and providers with the operational aspects of this change. Again, plans that offer one provider will see little or no effect from this new regulation.
Timing of In-Service Distributions from Employer Contribution Accounts — Very few GuideStone clients allow the withdrawal of employer-contributed dollars by employees who are still in service. For those employers whose plans do allow such withdrawals, some new restrictions will be imposed. Greater details on this aspect of the new regulations will be addressed in future GuideStone articles. Those interested in more immediate information should contact their GuideStone Relationship Manager.
New Definition of Severance from Employment — The new regulations provide some additional clarity to legal terms and phrases, one of which is “severance from employment.” For most churches and for employers that are simple single legal entities, this change will have no impact. But for employers who have complex structures and separate legal subsidiaries, there may be some application of this provision. For example, a nonprofit 501(c)(3) organization might own and control other related entities, such as for-profit subsidiaries and other nonprofits. Under the new regulations, an employee who moves from the nonprofit employer to the for-profit subsidiary may be considered as having experienced a severance from service from the nonprofit employer, unless the plan sponsor elects to be more restrictive in its 403(b) plan document.
Universal Availability — Certain 403(b) plans are subject to annual retirement plan nondiscrimination testing that demonstrates the plan does not discriminate in favor of highly compensated employees in design or practice. Plans subject to testing include 403(b) plans of employers such as nonprofit hospitals, colleges, universities and some children’s and retirement homes. These plans must satisfy the “universal availability” requirement. In simple terms this means that if you allow one employee to make personal tax-deferred contributions (salary reduction and Roth elective deferrals) to the plan, you must let all employees make personal tax-deferred contributions. Certain employees can be excluded from making personal tax-deferred contributions to the plan, and these exclusions must be stated in the written plan document. 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.” Most churches will not be affected by this provision in the regulations.
Effective Opportunity Required — As a part of the universal availability requirement, the IRS wanted to ensure that employers are taking steps to make all employees aware of their right to participate in the retirement plan. Under the new regulations, employers must be able to demonstrate that employees are being provided with “an effective opportunity” to make elective deferrals (personal tax-sheltered contributions). Specific “facts and circumstances” in each case will determine if this standard is being met. One of the facts and circumstances the IRS will look for is whether ongoing notice is being provided to employees of the opportunity to make elective deferrals. In essence, the regulations are sending a message to all employers to make, and continue making, employees aware of the tax deferral opportunities available to them under their retirement plan. As always, GuideStone stands ready to assist you in this process with communication pieces specifically designed to promote your plan and to educate employees in understanding the benefits of personally participating through salary reduction or Roth elective deferrals.
Requirement to Follow Plan Terms — As can be expected, the IRS mandates that an employer administers its plan in the way it is written. This dovetails with the point made earlier — have a written plan that meets certain legal standards. Your plan must have all the right provisions and those provisions must be followed. Disregarding this requirement is deemed an “operational failure,” a failure which comes with a cost. Certain failures by the employer in following the plan could adversely affect every individual for which the failure occurred. GuideStone Understands 403(b)(9) Church Plans
GuideStone will continue to work closely with others in the 403(b) plan industry to gain a better understanding of how these new regulations impact our clients. We will provide you with timely information so you are fully aware of any action steps you need to take related to your plan. We are as committed as ever to providing you with compliant plan documents and timely information concerning these final 403(b) regulations.
You may hear other 403(b) plan providers emphasize the merits of a single-provider solution for your 403(b) plan compliance issues. We would agree. In this ever-tightening environment of compliance, a sole provider may very well make life administratively simpler for you and for your employees. Consider this — most retirement plan providers are not church plan experts. Most are not focused on the unique ways that the final 403(b) regulations will impact plans like yours — 403(b)(9) church plans. GuideStone is. As a leading provider of church 403(b) plans, we are keenly focused on that very issue.
Look to future GuideStone articles for more information about the final 403(b) regulations. Contact their GuideStone Relationship Manager with any questions you have, and remember, GuideStone has a dedicated team of industry professionals with years of experience related to church plans. Our focus is on serving you and meeting your needs with excellence.
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