In 2007, the IRS made the first major revisions to 403(b) regulations for tax- exempt organizations in more than four decades. The IRS revised the regulations for tax-sheltered annuity programs, which will be effective on Jan. 1, 2009, and apply to all types of 403(b) plans, including those with employee salary deferral contributions. In addition to the revised IRS regulations, the Department of Labor (DOL) modified regulations that will affect 403(b) plans, including changing Form 5500 filing requirements effective for plan years beginning on or after Jan. 1, 2009. As a result, certain 403(b) plans will be subject to an audit, much like 401(k) plans. With less than 10 months remaining until the new regulations take effect, local governments should begin to prepare immediately to ensure compliance.
Until now, local governments have been able to administer 403(b) programs with relatively minimal employer and regulatory oversight. However, the dramatic rule changes significantly tighten the regulations and diminish ways those plans differ from 401(k) qualified plans. Local governments now will be required to create a written document outlining plan provisions, notify eligible employees of their ability to participate in the plan, monitor compliance with IRS limitations and non-discrimination requirements, and track participant contributions and distributions. There also are new restrictions on transferring money between 403(b) plans and additional costs to meet the requirements.
To begin preparing, local governments should consider the following:
Gather all current service provider contracts, agreements and other written communication. Increase communication with service providers. Determine which products and services they offer and the fees or surrender charges imposed.
Determine the amount of money employees have invested in their plans. This may create leverage in seeking fee reductions and ending surrender charges.
Understand the systems and processes that will be required to comply with the new rules.
Work with a professional service firm. They can help examine local agencies’ current retirement plan structures, assess the effect of the regulations on the organization, and determine whether a plan will be subject to an independent audit.
Send requests for proposals to new plan vendors. Consider consolidating service providers for 403(b) and 401(k) plans, which could lower fees and administrative burden.
Educate employees. Although the changes may appear administrative, plan sponsors will be required to inform employees of the 403(b) changes.
With more than 16,000 organizations filing the Form 5500 in 2006, the changes will significantly affect many CEOs, CFOs, and human resources and finance professionals. Preparing for the changes over the next several months will help local governments plan for Jan. 1, 2009.
The authors are managers in the Benefit Services Group of Minneapolis-based LarsonAllen.