ICI Asks for Implementation Delay for New 403(b) Transfer Rule

The Investment Company Institute (ICI), a mutual fund trade group, has asked the U.S. Treasury Department and the Internal Revenue Service (IRS) to put off the effective date of a new rule regarding 403(b) asset transfers.

Elena Barone, Assistant Counsel – Pension Regulation, ICI, asserted in a letter to W. Thomas Reeder, Treasury Department Benefits Tax Counsel, that the September 24, 2007 implementation date for the asset transfer rule “does not provide enough time for providers, employers, and participants to react to this major policy change.” ICI requested officials delay the rule implementation until December 31, 2008.

ICI said in a statement that the timing of this change particularly disadvantages participants and employers in the education field as most schools start their school year weeks before the change takes effect and the resources needed to explain the new rules to participants will be limited. “Participants, in particular, may be blindsided by the abrupt cutoff of their ability to move assets to investment choices not offered by their employer,” the statement said.

“As employers and service providers analyze the new regulations, they must make decisions about how to proceed once the new rules go into effect, including whether to permit exchanges or transfers as part of their plan or business model,” Barone wrote in the letter. “Many considerations enter into these decisions and providers need more time to fully understand the regulations and their implications for providers and employers.’

The new regulations incorporate numerous changes as a result of the passage of the Employee Retirement Income Security Act of 1974, the Tax Reform Act of 1986, the Small Business Job Protection Act of 1996, the Economic Growth and Tax Relief Reconciliation Act of 2001, and the Pension Protection Act of 2006. In general, the regulations reflect the extent to which these recent legislative efforts have diminished the differences between 403(b) arrangements and 401(k) and other tax-deferred retirement plans.

Other ICI Issues

In addition to the delayed effective date of the asset transfer rule, the ICI letter seeks additional guidance on several issues relating to the new regulations on:

  • reporting and withholding for exchanges,
  • accumulated benefit after an exchange,
  • significance of September 24, 2007 and grandfathering, and
  • orphaned accounts.

The ICI comment letter is here.

On July 23, 2007, the Treasury Department and the IRS released final regulations concerning these retirement savings arrangements sponsored by public schools and charitable organizations (See Final 403(b) Regulations Released). The IRS explained that “IRS audits and related investigations have revealed that employers encounter substantial difficulty in demonstrating compliance with hardship withdrawal and loan rules … particularly … when an individual’s benefits are held by numerous carriers.’

To have those transfers be considered an investment change within the same plan, the regulation 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.

In addition, 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.

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 must be exchanged, the IRS said.