403(b) aware

Although new regulations can sometimes lead to more headaches, plan advisers with 403(b) clients should not have to reach for the aspirin because of final Internal Revenue Service (IRS) regulations and a Department of Labor (DoL) guidance bulletin issued in late July. 

In fact, the two documents about 403(b) plans—generally available to not-for-profit and tax-exempt entities—could represent a real boon to advisers, offering ample opportunity for important client contact to help plan sponsors decide how they are affected by the rapidly changing regulatory environment.  

“You need to contact every client because they all will have to take a look at their plan and see if it fits with these regulations,” said Aaron Friedman, National Practice Leader for Non-Profit Consulting for The Principal Financial Group. “If nothing else, this is certainly an opportunity for a client touch. There’s some work to be done and some opportunity there for relationship building.”

Not only did the final IRS regulations give plans the time to get prepared—the effective date is now the 2009 plan year, and church plans have until their 2010 plan year to comply—the rules still allow the so-called “90-24 exchanges” in which participants move their money from one annuity contract to another.  

The regulations also kept the requirement that 403(b) plans have a formal plan document, much like their 401(k) cousins. The DoL Field Assistance Bulletin, issued the day after the IRS regulations, dealt with a 403(b) Employee Retirement Income Security Act (ERISA) safe harbor. 

Even though the final regs were seen as continuing the trend of migrating 403(b) programs toward a traditional defined contribution model, advisers say they already have been nudging their clients to move that way. The difference: Advisers now can make the argument with more force since the IRS regulatory framework is in place. “We’ve been pushing them in that direction for a few years,” said adviser Michael Francis, President of Francis Investment Counsel out of Hartland, Wisconsin. “It gives folks in my position a hammer. We’ve said this is a good idea, but now it’s kind of a law. I think the motivation level just got turned up a few notches with the release of the final regs. [Now] we can pick up the phone and say “OK guys, we’ve got to get moving.”” 

Adviser Nathan Trotman of RSI Financial Services in Mt. Laurel, New Jersey, also has been nudging his 403(b) clients closer to the 401(k) models for the last two years. “For most of our [403(b)] clients, when they look at their plans, they look like 401(k)s,” Trotman said.  

Trotman said one of his 403(b) clients interested in making the transition was constrained by restrictions on participants’ existing annuities, but has instituted changes for new participant contributions. “Going forward, all new money will be going to one vendor,” he said.  

Bruce Corcoran, Senior Vice President, National Markets, Education, AIG VALIC, said the conversations with 403(b) plan sponsors should go more smoothly now that they are no longer theoretical. “It ends a lot of speculation,” Corcoran said. “It allows plan sponsors to look at a set of fixed variables to get their mind around.”  

The Final Regs 

Perhaps the most significant shift in IRS position was the final decision to continue to allow “90-24 exchanges.’ Many people who submitted public comments were unhappy with suggestions that the asset transfers should be restricted, the IRS said. Tax officials explained that they had suggested the restrictions because of their experience in keeping track of such asset movement under the old rules. “IRS audits and related investigations have revealed that employers encounter substantial difficulty in demonstrating compliance with hardship withdrawal and loan rules,’ the IRS document stated. “These problems are particularly acute when an individual’s benefits are held by numerous carriers.’ 

Now, to have those transfers be considered an investment change within the same plan under the final rules, the IRS said the contract to which the assets are being moved must include distribution restrictions that are not less stringent than those imposed on the contract being exchanged. Also, the IRS said, the employer and the issuer of the second contract have to work out an agreement under which the employer and the issuer will periodically give each other information about the participant’s employment status. Also to be exchanged is information about issues such as whether a severance from employment has occurred for purposes of distribution restrictions and whether the hardship rules in the regulations are satisfied, the IRS said. 

The bottom line, according to Friedman, is that this means more work. “You have to have someone in the middle making sure all the plan requirements are being met.’  

Plan Document Requirement 

By the 2009 plan year deadline, most 403(b) plans must have in place a detailed plan document similar to those already required in other parts of the retirement savings world. The final regs allow plans to have a number of pieces serve collectively as the “plan document.’ However, the IRS made it clear that those multiple documents have to designate plan roles and responsibilities explicitly—and that those documents cannot work at cross purposes with each other. 

“The existence of a written plan facilitates the allocation of plan responsibilities among the employer, the issuer of the contract, and any other parties involved in implementing the plan,’ the tax officials wrote. “Without such a central document for a comprehensive summary of responsibilities, there is a risk that many of the important responsibilities required under the statute and final regulations may not be allocated to any party.’ 

Asserted Friedman: “It’s up to the plan sponsor [to make sure] that there are no contradictions. Someone needs to understand that there has to be compliance. There are rules, and someone has to be responsible for them.’ 

“The regulations make clear that they [IRS officials] are not telling employers how to structure a plan,’ said Richard Turner, Vice President and Deputy General ¬Counsel AIG VALIC. “It doesn’t mean employers have to do it. It means they have to express [in the plan document] who is doing it.’ 

The 403(b) experts agreed that the imposition of the plan document requirement was part of the continuing 403(b) evolution. The traditional 403(b) model generally is characterized by minimal plan sponsor involvement and multiple vendors—in some cases, dozens of providers. The newer version is likely to lead to a much greater degree of involvement with fewer vendors, or even a single vendor.  

“Employers now featuring a more traditional 403(b),’ said Friedman, “are going to have to take a hard look at whether they want to keep running the program that way.’  

The final 403(b) regulations are online at www.plansponsor.com/pdfs/403bfinalregs.pdf 

SIDEBAR:Safe Harbor 

In Field Assistance Bulletin 2007-02 (www.dol.gov/ebsa/regs/fab2007-2.html), the DoL’s Employee Benefits Security Administration (EBSA) sets out a safe harbor allowing a 403(b) program funded only with employee contributions to not be treated as a pension plan “established or maintained’ by the employer for purposes of Title I of ERISA.  

To qualify for the safe harbor, the plans have to show that: 

• participation of employees is completely voluntary, 
• all rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee, or by an authorized representative of such employee or beneficiary, 
• the involvement of the employer is limited to certain optional specified activities, 
• the employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable reimbursement to cover expenses properly and actually incurred in performing the employer’s duties pursuant to the salary reduction agreements.