Sometimes it seems as though the list of entities with requirements of 403(b) plan sponsors is endless. In addition to keeping participants well served and satisfied, government regulatory agencies, such as the IRS, the DOL, and ERISA, have regulations and requirements that must be adhered to.
For a long time, there were major differences between the requirements relating to 401(k) and 403(b) plans. In 2007, the IRS issued new regulations for 403(b) retirement plans; these were the first significant rule changes for 403(b) plans in more than 40 years. These regulations require more oversight and documentation from sponsors of 403(b) plans. To meet the new responsibilities, plan sponsors will need a greater level of information sharing and coordination with the plan’s investment providers.
For the purposes of this article, we are offering a general overview of some of the common requirements relating to 403(b) plans.
Perhaps the most important requirement of any 403(b) plan is a written plan. There must be a plan document that specifies all of the plan’s terms and conditions for eligibility, benefits, limitations, available investments, and distributions. This requirement applies regardless of whether the 403(b) plan is subject to ERISA. In the case of a plan with multiple investment providers, the IRS expects there to be a single plan document to coordinate administration among the investment providers. The plan document must be amended periodically to comply with current law. The IRS provides resources to help keep plans up-to-date.
Contract exchanges among custodial accounts and annuity contracts under a plan are permitted subject to certain conditions.
Deposit of Employee Contributions
All contributions to a 403(b) plan account must be deposited or transferred to an annuity contract issuer within a period that is not longer than is reasonable for the proper administration of the plan. 403(b) plans governed by ERISA may be subject to more restrictive requirements.
The Internal Revenue Code limits the amount an employer and employee can contribute on a tax-deferred basis. The 15-year rule continues to permit long-service employees at qualifying institutions to make special catch-up contributions.
Plan loans may be made available to 403(b) plan participants, using their retirement account as collateral for the loan, as long as they are permitted by the terms of the retirement plan and certain legal requirements imposed under IRC.
Account balances attributable to employee elective deferrals in 403(b) plans cannot be paid to a participant until the participant has a “distributable event,” such as a disability, severance from employment, or reaching age 59. These withdrawals are subject to income tax and, in some cases, penalties. A distributable event is required for distributions of amounts attributable to employer contributions in annuity contracts issued after 2008. Following are two exceptions to these withdrawal restrictions, provided they are permitted and set forth in the plan document.
1. Pre-1989 403(b) annuity accumulations attributable to employee elective deferrals
2. After-tax employee contributions
Minimum Distribution Requirements
Federal law normally requires participants in tax-favored plans to begin receiving income or taking required distributions by a specific date. With some exceptions this required beginning date (RBD) is April 1 following the year the participant reaches age 70 or terminates employment, if later.
Information Sharing Agreements
There are specific rules governing how a 403(b) contract or custodial account can be exchanged for another 403(b) annuity contract or custodial account of another vendor.
Employer-funded ERISA 403(b) retirement plans must apply the statutory nondiscrimination requirements, including controlled group rules that apply to tax-exempt organizations (other than governmental and certain church plans). Elective deferrals to 403(b) plans are exempt from the actual deferral percentage (ADP) test. In lieu of the ADP Test, 403(b) plans continue to be subject to the “universal availability” requirement for elective deferrals. In general, if one employee is allowed to make 403(b) elective deferral contributions, all employees must be allowed to make elective deferrals (subject to limited exceptions). Employees must be given an opportunity to make or change salary deferral elections.
Barring some exceptions for 403(b) ERISA plans, a form 5500 must generally be filed by the last day of the seventh month following the end of the plan year.
SPDs and SMMs
When an employee becomes a participant in an ERISA-covered 403(b) retirement plan, or a beneficiary begins receiving benefits under such a plan, they are automatically entitled to receive a summary of the plan called the Summary Plan Description (SPD). If a provision of the plan required to be in the SPD is modified, participants must be informed either through a revised SPD or in a separate document called a Summary of Material Modifications (SMM).
ERISA provides a definition of who is a fiduciary, along with the requirements fiduciaries are expected to meet.
The above is merely a general summary of some of the most common rules included in the 403(b) regulatory scheme. The full details of the rules relating to 403(b) plans can be quite daunting. As always, whenever there is a question as to what the rules are, a plan sponsor should seek the guidance of a qualified plan attorney.