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.
It is important to note: Various kinds of employers use 403(b) retirement plans. Churches and QCCOs which do not have for-profit subsidiaries and use only the Servant Solutions Retirement Plan as their retirement plan provider will not be impacted by all of the changes listed below. For those churches and QCCOs, much of the new regulatory requirements for monitoring distributions and hardship withdrawals can be assigned to Servant Solutions.
What are the high points?
Written Plan Requirement — The regulations confirm that you need a written plan that meets certain legal standards. This can be fairly simple if you utilize one 403(b) plan provider, like Servant Solutions, which can provide most of the plan documentation you need. Some providers have been offering 403(b) retirement plan services to employers for years with no underlying written legal plan document. The regulations generally no longer allow this beginning in 2009.
A further complexity to this requirement arises when an employer offers multiple plan providers under 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 contribution limits, hardship withdrawals and loan limits (if applicable) when a participant holds accounts with multiple providers. Neither the employer nor the plan provider is permitted to 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. (NOTE: If the employer made contributions to multiple providers at any time since the beginning of 2005, this heightened level of responsibility exists – even if the employer decides to use only one 403(b) provider beginning in 2009.)
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 — you must have a written plan that meets certain legal standards. Your plan must have all the required 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.
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.” A contract exchange is a movement of retirement assets between a 403(b) vendor (with a payroll slot) and a 403(b) vendor (who does not occupy a payroll slot) within the same plan. 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. This particular provision took effect on Sept. 25, 2007. A plan to plan transfer is a movement of retirement assets between separate 403(b) plans, where contributions, earnings and tax basis amounts are maintained. Such transfers may only be made to the plan sponsored by a current or former employer of the participant whose account is being transferred, and are therefore likely to be of limited use. There are special rules that apply to these transfers. Consequently, these types of exchanges and transfers will no longer be allowed between providers with which an employer has no formal relationship. 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 — This provision impacts plans that allow employees to withdraw employer-contributed dollars while still in service to that employer without the occurrence of some event, such as reaching a specified age. Since the Servant Solutions Retirement Plan does not make provision for in-service withdrawals of employer dollars until participants attain age 60, this regulation change is already satisfied for employers that use only the Servant Solutions Retirement Plan.
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. Under one of these nondiscrimination rules, plans of these employers 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 deferrals) to the plan, you must let all employees make personal tax-deferred contributions. Certain limited groups of employees can be excluded from making personal tax-deferred contributions to the plan, and these exclusions must be stated in the written plan document. For example, one of the groups of employees that can be excluded from the universal availability requirement is, “employees who normally work fewer than 20 hours per week.” Violation of the universal availability rule is best avoided by allowing all employees to make Participant Before-Tax Contributions (salary reduction deferrals) to the plan. Churches and QCCOs will not be affected by this provision in the regulations.
Effective Opportunity Required — As a part of the universal availability requirement, the IRS wants to ensure that employers take steps to make all employees aware of their right to participate in the retirement plan. Therefore, the new regulations require employers to demonstrate that employees are being provided with “an effective opportunity” to make elective deferrals (personal tax-sheltered contributions). According to the IRS, whether this standard is being met depends on specific “facts and circumstances” such as whether the employer provides ongoing notice 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. Again, churches and QCCOs will not be affected by this provision in the regulations.
Is a single-provider solution best?
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. Plan participants are served well when employers provide the Servant Solutions Retirement Plan as their sole retirement plan. Ministers and employees appreciate the quality of the plan and the simplicity of “taking their retirement plan with them” when moving from one Plan-approved employer to another. Importantly, as a church plan, retirees who are ministers may have retirement benefits designated (within legal limits) as tax-free housing allowance.