After an extensive review, the Department of Treasury has issued new regulations under section 403(b) of the Internal Revenue Code. In addition, in response to concerns raised by the final regulations, the Department of Labor has issued guidance clarifying when a 403(b) plan is subject to ERISA. This update provides an overview of these changes. Employers should note: The new 403(b) regulations are generally effective as of January 1, 2009, but a provision in the new 403(b) regulations revokes the ability of employees during employment to transfer amounts to a provider other than the provider selected by the employer as permitted under Revenue Ruling 90-24 (90-24 transfers) as of September 24, 2007. This means that 90-24 transfers should not be permitted after September 24, 2007.
New 403(b) Regulations
The new 403(b) regulations generally follow the proposed 403(b) regulations and have the effect of making 403(b) plans more like 401(k) plans. The new 403(b) regulations include the following requirements:
- Written Plan Document.The new 403(b) regulations require a written plan document (previously, the Code did not contain such a requirement).The plan document may be one or more documents that contain the plan’s eligibility, benefits, and limitation terms.
- Eligibility.The new 403(b) regulations remove certain restrictions on eligibility that had previously been permitted.In general, section 403(b) requires employees to be universally eligible to make elective contributions to a 403(b) plan.Notice 89-23 had allowed employers to exclude employees covered by a collective bargaining agreement, employees who made a one-time election to participate in a governmental plan instead of a 403(b) plan, and certain other limited classes of employees.The new 403(b) regulations remove these restrictions, but if a 403(b) plan has these restrictions, they may generally continue until January 1, 2010 (a special effective date applies for the exclusion of employees subject to a collective bargaining agreement).Note:This change does not apply to governmental entities (such as public school districts) for which Notice 89-23 will continue to be a reasonable good faith standard.
- Transfers.The new 403(b) regulations impose new restrictions on transfers of amounts in a 403(b) plan.The IRS considered, but did not change, the existing restriction on plan-to-plan transfers of amounts under a 403(b) plan to a 401(a) plan.The new 403(b) regulations confirm that 401(a) and 457(b) plans cannot accept plan-to-plan transfers from a 403(b) plan and a 403(b) plan cannot accept plan-to-plan transfers from such plans (one limited exception is the purchase of service credit in governmental defined benefit plans).
The new 403(b) regulations were published in the Federal Register on July 26, 2007 (72 Fed. Reg. 41,128).
End of 90-24 Transfers
The IRS has been concerned that 90-24 transfers from a provider working with an employer to a provider not working with an employer may lead to failure to comply with distribution restrictions that apply to the amounts transferred to the other provider. To prevent such failures, the new 403(b) regulations restrict the transfers previously permitted under Revenue Ruling 90-24 (90-24 transfers) as of September 24, 2007. The new 403(b) regulations permit an exchange of contracts (amounts) from one provider to another if the provider receiving the amount has a written agreement with the employer and the new provider’s distribution restrictions are not less restrictive than those at the provider from which the amount is being transferred. The regulations also permit limited plan-to-plan transfers and the purchase of certain service credits. Still, this change represents a significant restriction and that makes 403(b) plans more like 401(k) plans.
403(b) Plans and ERISA
ERISA contains a provision that exempts certain voluntary 403(b) arrangements that limited the employer’s involvement and did not receive employer contributions from ERISA. See 29 C.F.R. § 2510.3-2(f). The written plan document requirement under the new 403(b) regulations has raised the concern that the Department of Labor would view voluntary 403(b) arrangements that comply with the plan document requirement as subject to ERISA. Note: Church plans and governmental plans, such as those maintained by public school districts, are not subject to ERISA and, therefore, this is not an issue for these plans.
In response to this concern, the Department of Labor issued Field Assistance Bulletin 2007-02, which addresses when ERISA applies to 403(b) arrangements. The bulletin provides:
- Compliance with 403(b).The DOL indicates that employer activities to assure compliance with section 403(b) does not automatically make a 403(b) arrangement a “plan” for purposes of ERISA.The DOL specifically states that an employer “by adopting a written plan, does not automatically establish” a plan subject to ERISA.
- Discretionary Determinations.The DOL indicates that if an employer makes discretionary determinations it will be viewed as maintaining a plan for purposes of ERISA.Examples of discretionary determinations include determining what investments may be offered, whether a participant may have a loan, whether an order is a qualified domestic relations order, and whether a participant may receive a distribution.
- Employer Contributions.Although not addressed in the guidance, it is worth noting that the DOL views any 403(b) arrangement that provides for employer contributions as a plan for purposes of ERISA.
Field Assistance Bulletin 2007-02 was published on July 24, 2007 and is available at the following link: http://www.dol.gov/ebsa/pdf/fab2007-2.pdf.
Controlled Groups That Include Tax-Exempt Entities
Accompanying the new 403(b) regulations are final regulations that govern the controlled group status of tax-exempt entities. The controlled group regulations provide in general that a tax-exempt entity is under the control of another entity (entity A) if entity A controls 80% of the board of directors or trustees of the tax-exempt entity. The regulations indicate that a director or trustee is under control if either (i) the director or trustee of the tax-exempt entity is a director, trustee, or employee of entity A, or (ii) entity A has the ability to remove and appoint the director or trustee of the tax-exempt entity. The controlled group rules also permit aggregation in certain cases where there is a substantial business reason for permitting aggregation and the situation is not abusive.
Note: These controlled group rules do not apply to certain church entities and do not apply to governmental entities. Until the IRS issues further guidance, such entities may continue to rely on the guidance in Notice 89-23.
The new 403(b) regulations and guidance from the DOL clarify several issues regarding 403(b) plans and impose new requirements on employers. If you have questions regarding the guidance, please contact the attorney with whom you work.
Originally appeared in Dorsey's Benefits and Compensation Update