Final 403(b) Regulations
Danny Miller
Erica Summers
© 2007 Conner & Winters, LLP
1627 I Street NW, Suite 900
Washington, D.C. 20006
202-887-5711
CONNER & WINTERS
Introduction
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Final Regulations issued July 26, 2007.
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Generally effective beginning January 1, 2009.
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Special effective dates apply to certain provisions;
some of these special effective dates key off of the
date the Final Regulations were issued.
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Definitions
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Church
– Church as defined in Code section 3121(w)(3)(A);
– Qualified church controlled organization defined in Code
section 3121(w)(3)(B) (“QCCOs”).
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Church-Related Organization
– Church;
– Convention or association of churches;
– Organization described in Code section 414(e)(3)(A) (i.e.
church pension board).
Note: Neither definition includes non-QCCOs.
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Definitions
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Section 403(b) Plan –
The “plan of the employer under which the section 403(b)
contracts for its employees are maintained.”
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Section 403(b) Contract –
Underlying funding mechanism, i.e.,
– 403(b)(1) annuity contract;
– 403(b)(7) custodial account;
– 403(b)(9) retirement income account.
Note: In multiple vendor situation, IRS contemplates a
single 403(b) “plan” that wraps around all separate 403(b)
“contracts.”
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Plan Document
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All 403(b) contracts must be maintained pursuant to a
written plan document that satisfies the requirements of
403(b) in form and operation.
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No need for single document.
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Can incorporate other documents by reference.
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Plan Document
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Plan must contain all material conditions – e.g.,
– Eligibility;
– Contributions limitations;
– Vesting;
– Time and form of benefits;
– Distribution restrictions;
– Minimum distribution requirements (401(a)(9)
rules);
– Eligible rollover requirements.
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Plan Administration
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The employer is responsible for coordinating plan
administration for purposes of compliance.
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Plan document can allocate compliance and other
administrative responsibilities (to a TPA or one of several
multiple vendors).
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Administrative and compliance responsibilities cannot be
delegated to participants.
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No participant “self-certification” is permitted.
Query: How are responsibilities allocated in multiple vendor
situation?
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It is not clear what employer needs to do with respect to
“orphan” plans.
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Contributions
Elective deferrals –
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Includes pre-tax salary reduction and designated
Roth after-tax contributions.
Note: Salary reduction agreement must clearly
specify whether contributions are pre-tax or
Roth.
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Must be made pursuant to salary reduction agreement
that meets requirements of 401(k).
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Subject to anti-conditioning rule (cannot condition
receipt of another benefit on making elective
deferrals to the 403(b) plan).
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Contributions
Elective Deferrals – Limitations
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Subject to Code section 402(g) limits.
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Special 402(g)(7) catch-up provision –
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Available to employees with 15 years of service with
“qualified organization” (church service within same
denomination can be aggregated).
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Limit is least of following:
•
•
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$3,000, or
$15,000 reduced by prior special 402(g) catch-up
amounts, or
Excess of $5,000 times years of service over prior
elective deferrals.
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Contributions
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Ordering of elective deferrals (for purposes of the
elective deferral limit):
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First, regular 402(g) limits.
–
Next special 402(g)(7) 15-years of service
catch-up.
–
Finally, age 50 catch-up contributions.
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Contributions
Contributions for former employees
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Employer can make contributions through 5th year
following year of termination. (Can actually contribute
for up to 6 years.)
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Nonelective employer contributions only; no salary
reduction or employee after-tax contributions.
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Amount of permitted post-employment contributions
calculated on a monthly basis. (No contributions after
death.)
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Cannot discriminate in favor of HCEs (applies only to
plans subject to nondiscrimination and coverage rules,
including plans sponsored by non-QCCOs).
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Vesting
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403(b) plans can include vesting schedule.
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Non-vested amounts must be accounted for separately.
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Non-vested amounts are treated as part of a 403(c)
annuity contract (or a 402(b) trust) until such amounts
vest.
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No need to set up a separate 403(c) annuity or 402(b)
trust to hold non-vested amounts (nor even a 403(c) or
402(b) account or “bucket”).
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Excess Contributions
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All contributions subject to 415(c) contribution limits;
salary reduction contributions also subject to 402(g)
limits.
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Amounts in excess of limits will fail to be a 403(b)
contract and must be either a 403(c) contract or a 402(b)
trust.
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Separate accounting required (again, separate accounting
and not a separate account).
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Vested excess contributions are taxable in year in which
they were contributed.
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Non-vested excess contributions are taxable in the year
in which they vest.
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Crediting Contributions
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Contributions must be transmitted to funding vehicle
“within a period that is not longer than is reasonable for
the proper administration of the plan.”
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Crediting within 15 business days of month following
deferral is considered reasonable.
Note: This rule is different from DOL requirements on
crediting contributions.
Query: What is “reasonable” for proper administration of
plan in case of employer contributions?
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Nondiscrimination and Coverage
General Rules
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No more reasonable, good faith standard for compliance
with nondiscrimination and coverage requirements.
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Notice 89-23 safe harbors no longer applicable.
Note: Nondiscrimination and coverage requirements do
not apply to churches and QCCOs; but they do apply to
non-QCCOs.
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Nondiscrimination and Coverage
Employer Contributions and After-Tax Contributions
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Must comply with nondiscrimination and coverage
requirements applicable to qualified plans –
–
401(a)(4);
– 410(b);
–
401(a)(17);
–
401(m).
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Nondiscrimination and Coverage
Salary Reduction Contributions – Universal availability
requirement
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Certain categories of employees can permissibly be
excluded:
– Employees eligible under another 401(k) or 403(b) plan;
– Nonresident aliens;
– Students; and
– Employees normally working < 20 hours/week.
Safe harbor: In first year, employer must reasonably
expect employee to work fewer than 1,000 hours, and in
all following years, employee must have actually
worked fewer than 1,000 hours in preceding year.
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Nondiscrimination and Coverage
Salary reduction contributions – Universal availability
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Additional exclusions under Notice 89-23 no longer apply:
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Religious order members who have taken vow of
poverty (but Preamble to Final Regulations clarifies that
such individuals are not employees and thus not subject
to universal availability rule);
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Employees covered by collective bargaining;
–
Visiting professors.
Note: A special effective date applies to this provision. A
plan containing any of these exclusions on July 26, 2007
generally has until the first day of the taxable year beginning
after December 31, 2009.
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Nondiscrimination and Coverage
Salary reduction contributions – Universal availability
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Meaningful notice requirement.
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Employees must have continuing “effective opportunity”
to make salary reduction contributions.
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Whether there is effective opportunity depends on facts
and circumstances.
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Distributions
Salary Reduction Contributions
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Can distribute only upon severance from employment, death,
disability, attainment of age 59½, hardship.
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Definition of “severance from employment” – employee
ceases to be employed by eligible employer maintaining the
plan.
Examples:
– Employee transfers from 501(c)(3) organization to forprofit subsidiary.
– Chaplain working for entity that is ineligible to maintain
403(b) plan ceases to perform services as minister, even
though he/she continues to work for same entity.
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Distributions
Employer Contributions
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Distributable events:
– Severance from employment;
–
Attainment of specified age or number of years of
service;
– Prior occurrence of specified event.
Note: Financial need, including need to purchase
retirement home is permissible event.
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Distributable events must be specified in plan document.
Note: This distribution restriction does not apply to annuity
contracts issued before January 1, 2009.
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Distributions
Rollover Contributions and After-Tax Contributions
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No distribution restrictions apply.
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Contract Exchanges
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Contract exchanges must meet following requirements:
– Plan must specifically provide for exchange.
– Distribution restrictions on receiving contract must be
no less stringent than original contract.
– Employer must have information-sharing agreement
(“ISA”) with issuer of receiving contract.
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Special effective date:
– Rules apply to exchanges after September 24, 2007.
– Don’t need to have ISA until January 1, 2009.
– But if no ISA on January 1, 2009, the exchange is
taxable event. (Not clear whether taxable in 2009 or
at time of prior exchange.)
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Plan-to-Plan Transfers
Plan-to-plan transfers must meet following requirements:
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Receiving plan must impose distribution restrictions
no less stringent than those imposed under
transferring plan.
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Participant whose assets are being transferred must
be employee or former employee of employer
maintaining receiving plan.
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If transfer is of only portion of participant’s interest,
the different types of funds are transferred on pro
rata basis.
Note: Transfers allowed only between 403(b) plans.
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Plan Termination
403(b) plans can be terminated if:
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All of participants’ accumulated benefits distributed
as soon as administratively practicable after
termination; and
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Employer does not make contributions to another
403(b) contract during the 12 months before or after
termination.
Note: Limited exception if fewer than 2% of
employees eligible under 403(b) plan are eligible
under alternative 403(b) plan.
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Failure to Comply
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Failures relating to individual contract – affects the 403(b)
contract and all other 403(b) contracts purchased for
individual by same employer.
Examples: Violations of distribution restrictions;
loans in excess of statutory limits; contributions in
excess of 402(g) limits.
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Operational failures – affects all contracts issued by the
employer to all employees with respect to whom
operational failure has occurred.
Examples: Failure to follow plan’s eligibility
requirements.
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Failure to Comply
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Plan-wide failures – affects all contracts issued under plan;
all contributions and earnings under plan become taxable.
Examples: Failure to comply with nondiscrimination
rules; employer eligibility failures; failure to have
contracts issued pursuant to a plan that meets the
regulatory requirements for a written plan document.
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Special Church Plan Rules
Requirements for retirement income accounts:
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Plan document must specifically state that it is intended to be
church retirement income account.
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Investment performance must be based on gains and losses
on the plan’s assets.
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Can invest in mutual funds without becoming 403(b)(7)
custodial account.
Note: Any asset that is owned or used by a participant or
beneficiary is treated as distribution (e.g., artwork; antique
furniture or luxury cars).
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Special Church Plan Rules
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Exclusive benefit rule.
Note: No loans or other extensions of credit to employer.
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Chaplains and self-employed ministers can participate.
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Includible compensation for self-employed ministers is
earned income (computed without regard to Code section
911 exclusion for foreign service income).
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Years of service within the denomination are aggregated.
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Can pay annuity benefits if:
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Amount of distribution must have actuarial present
value equal to participant’s accumulated benefit; and
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Plan sponsor must guarantee benefits.
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Special Church Plan Rules
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403(b)(9) plan can commingle with other amounts
devoted exclusively to church purposes; but must
separately account for 403(b)(9) assets.
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If 403(b)(9) plan assets are held in trust, they can be
commingled in collective investment trust (Revenue
Ruling 81-100 trust).
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Trust holding 403(b)(9) assets is tax-exempt (but a trust is
not required).
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Special Church Plan Rules
Defined benefit 403(b)(9) plans are permitted –
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Must have been in existence on September 3, 1982;
and
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Must apply both 415(c) contribution limits and
415(b) benefit accrual limits.
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Special Church Plan Rules
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Designated Roth contributions can be made on
behalf of foreign missionaries and self-employed
ministers.
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Special effective date for plans maintained by
churches or church-related organizations for which
the authority to amend is held by a church
conventions: First plan year after 12/31/2009.
Note: This has limited application.
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Controlled Group Rules
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Basic Rule – Common control if 80% directors/trustees of
one organization are directly or indirectly controlled by, or
are representatives of, other organization.
Note: These rules do not apply to churches and QCCOS;
they do apply to non-QCCOs.
Query – Does Notice 89-23 still apply to churches and
QCCOs?
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Permissive Aggregation – organizations can choose to be
aggregated if:
– They maintain a single plan; and
– They regularly coordinate their day-to-day exempt
activities.
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Controlled Group Rules
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Permissive Disaggregation – Church plans receiving
contributions from more than one entity, at least one
of which is a non-QCCO, may disaggregate
churches from the non-QCCOs – but, as the Final
Regulations are written, only if they participate in a
multiple employer church plan.
Effective date for controlled group rules: Plan years
beginning after December 31, 2008.
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