Final 403(b) Regulations Released

Experts say that the finalized 403(b) rules, released on Monday by the Internal Revenue Service (IRS), represent a potential opportunity for plan advisers.

Not only will advisers have to help clients ensure compliance generally, they will have to provide specific guidance on whether clients with an older model 403(b) plan with little plan sponsor involvement and multiple vendors should follow a continuing industry trend in which more 403(b) plans are transforming themselves into more of a 401(k)-type program.

“You need to contact every client because they all will have to take a look at their plan and see if it fits with these regulations,” said Aaron Friedman, National Practice Leader for Non-Profit Consulting for The Principal, in an interview with “If nothing else, this is certainly an opportunity for a client touch. There’s some work to be done and some opportunity there for relationship building.”

Added Bruce Corcoran, Senior Vice President, National Markets, Education at AIG VALIC: “They (the new regulations) are a known quantity and will allow (advisers) to work with plan sponsors to design the plan of the future.”

Effective Dates

Although the proposed version of the regulations was set to kick in with the 2008 plan year, the final regulations are generally not effective until the 2009 plan year and church plans will have until their 2010 plan year, for example. “I think there were some favorable effective dates there,” concluded Richard Turner, Vice President and Deputy General Counsel, AIG VALIC.

90-24 Transactions

In another closely watched facet of the long-awaited regulations, tax officials ultimately decided against banning so-called “90-24 exchanges” in which participants move their money from one annuity contract to another.

The tax officials explained that they had suggested the restrictions because of their experience in keeping track of such asset movement under the old rules. “IRS audits and related investigations have revealed that employers encounter substantial difficulty in demonstrating compliance with hardship withdrawal and loan rules,” the IRS document stated. “These problems are particularly acute when an individual’s benefits are held by numerous carriers.’

To have those transfers be considered an investment change within the same plan, the IRS said the contract to which the assets are being moved must include distribution restrictions that are not less stringent that those imposed on the contract being exchanged.

Also, the IRS said, the employer and the issuer of the second contract have to work out an agreement under which the employer and the issuer will periodically give each other information about the participant’s employment status. Also to be exchanged is information about issues such as whether a severance from employment has occurred for purposes of distribution restrictions and whether the hardship rules in the regulations are satisfied, the IRS said.

“You have to have someone in the middle making sure all the plan requirements are being met,’ said Friedman, noting that the regulations put an additional burden on plan sponsors. “We’re not displeased with the outcome, but having 90-24 transfers is going to be more difficult to do.’

Plan Documents

While sticking with their original proposal to require 403(b) plans to have plan documents similar to those already required in other parts of the retirement savings world, tax officials agreed to allow plans to have a number of documents to serve collectively as the “plan document.” However, the IRS made it clear that the multiple documents have to explicitly designate plan roles and responsibilities – and that those documents cannot work at cross purposes with each other.

“The existence of a written plan facilitates the allocation of plan responsibilities among the employer, the issue of the contract, and any other parties involved in implementing the plan,’ the tax officials wrote. “Without such a central document for a comprehensive summary of responsibilities, there is a risk that many of the important responsibilities required under the statute and final regulations may not be allocated to any party.’

Concluded The Principal’s Friedman: “It’s up to the plan sponsor that there are no contradictions. Someone needs to understand that there has to be compliance. There are rules and someone has to be responsible for them.’

The final regulations are available at