403(b) PLANS AND THE NEW IRS REGULATIONS
The following is a brief explanation of the new 403(b) regulations and their affect on School Districts. This summary is not all-inclusive of the regulations and is not intended to provide legal advice.
What is a 403(b) Plan?
A 403(b) retirement plan is similar to the more well-known 401(k) retirement plans in private industry. Named after the section of the IRS code which established them, these Plans permit public education employees to contribute on a tax deferred basis a portion of their wages into a retirement account. Both the participant contributions and the earnings on those contributions are tax deferred until the participant takes distribution of the funds.
May the employer contribute to this account?
Yes, employer contributions are permitted. Both the employer contribution amount and the earnings on those contributions are likewise tax deferred until distributed.
Are there limits on the amount deferred?
Yes, there are annual limits established for both the amount the participant may “electively” contribute, known as the 402g limit (currently $15,500), and an annual total limit that may be contributed to by both the employer and employee known as the 415c limit (currently $46,000). Both limits are indexed in $500 increment levels.
What investments are permitted in a 403(b) Plan?
There are only two categories of investments permitted in a 403(b) Plan: annuities and mutual funds.
THE NEW REGULATIONS
Why did the IRS issue new rules?
The Internal Revenue Service determined, after a series of audits, that administration of 403(b) Plans was lax and inconsistent. The IRS therefore issued new regulations providing guidance for the design and administration of 403(b) Plans and to clearly establish accountability and responsibility for the administration of the Plan. These new regulations are designed to increase tax compliance by participants, mandate the employer to take direct operational involvement and administrative control and ease the oversight duties of the IRS.
What are some of the key changes?
- 403(b) programs must now have a written Plan Document which contains all material terms and conditions of the Plan, including eligibility, benefits, investment alternatives, and the time and form of distributions.
- Administration and compliance responsibilities may be allocated between the employer and/or third parties (such as product providers and third party administrators), but may not be assigned to employees.
- Transfers and exchanges from one investment provider to another is permitted, but with limitations. Plans may permit exchanges from one investment product to another as long as the investment company receiving the transferred amount establishes a relationship with the employer (or third-party representative) to exchange information necessary for compliance.
- Employers must remit contributions within a reasonable period for the administration of the Plan. The regulations suggest that remitting salary reduction contributions within 15 business days after the end of the month in which such amounts would otherwise have been paid, is considered reasonable.
- Employers may not exclude groups of employees from the 403(b) Plan by classification, such as substitute teachers, bus drivers or similar groups of employees unless they are eligible to participate in another salary reduction program (such as a 457(b) Plan), they are unwilling to contribute at least $200 annually to the 403(b) Plan, or they normally work fewer than 20 hours per week for the employer.
- Employees must receive “meaningful notice of their right to participate in the 403(b) Plan, and such notice must be provided at least annually.
- Employees must be given the right to enroll, change their investment instructions (for new contributions), and stop making contributions at least annually.
When did these new regulations take affect?
The changes generally took effect January 1, 2009. There are some exceptions for those Plans maintained by a collective bargaining agreement which allows for the later of the termination of the collective bargaining agreement, or July 26, 2010, whichever is earlier.
What are the primary concerns?
There are several:
- Not adopting a Plan Document: If a School District does not adopt a 403(b) Plan Document by the January 1, 2009 date, the entire Plan will be in non-compliance and will be disallowed. This would require a distribution of the Plan assets to all participants, active and retired, with the resulting tax implications. This is easily avoided as MEA Financial Services can supply a Plan Document to the District without charge or the District can adopt the “Section 403(b) Model Language for a Public School” Plan Document supplied by the Internal Revenue Service in Rev. Proc. 2007-71.
- The selection of a Plan Administrator: The regulations permit the District to select a Plan administrator for their 403(b) Plan. We believe this to be a subject of collective bargaining. MEA Financial Services is a licensed TPA and can provide those services.
- The selection of the product providers in the Plan: The regulations require the employer to select the product providers for the 403(b) Plan in the District and name them as part of the Plan. We believe this to be a subject of collective bargaining and we seek to maintain our presence in the Districts.
- District adherence to “Universal Eligibility”: Failure to allow all employees of a District to participate in the 403(b) Plan will cause the Plan to fail. Employers may not exclude any employees by classification. The exception to this requirement is for persons eligible to participate in another salary reduction deferred Plan, students, and persons who normally work less than 20 hours per week. The requirements to maintain the time records for these employees preclude making this a viable option.
What is required in the Plan Document?
The Plan Document must be written and contain all the material terms and conditions of the 403(b) arrangement in the District such as eligibility, benefits, investment alternatives, loan request processes, Plan hardship request procedures and the time and form of distributions as an example.
Do the new regulations eliminate the 403(b) from being used as an ERI?
No. The regulations affirm the ability of the employer to make contributions to an employee’s account for up to five years after separation form service which retains the ability of 403(b) Plans to be used for Early Retirement Incentives. However, the regulations state that payments may no longer be made to an employee’s account after the employee dies.
Are 403(b) Plans bargained in other ways?
Yes. In addition to early retirement incentives, 403(b) Plans have been bargained for structured settlements, terminations, and employer contributions to employee retirement programs.
Do these new regulations have bargaining implications?
Yes. Provisions of the new regulations not subject to bargaining are nonforfeitability, contribution limitations, universal eligibility, and permitted and required distributions. Provisions that may be subject to bargaining include the selection of investment vendors, the types of investments permitted, Plan benefits, such as loans and hardships, and who and how the Plan is administered.
How does MEA Financial Services fit in?
MEA Financial Services (MEA/FS) has been providing 403(b) programs to the public school districts of Michigan for over 35 years. We seek to maintain our presence as a provider of 403(b) Plan investment options as well as a member benefit.
Can MEA/FS provide 403(b) administrative services?
Yes. MEA/FS is a licensed Third Party Administrator (TPA) and has the capability to perform the required administrative services.