After more than two years of deliberation, on July 23, 2007, the U.S. Treasury Department and the Internal Revenue Service (IRS) released updated regulations for 403(b) plans, retirement savings arrangements sponsored by public schools and charitable organizations. Agents who provide 403(b) plans need to be aware of the changes and should be prepared to discuss them with their clients.

The revisions are the first comprehensive update of 403(b) regulations since 1964, and are aimed at bringing the 403(b) program more closely into line with other retirement-savings plans, such as 401(k)s.

The final regulations reflect legislative and regulatory developments released over the past 40 years, including amendments stemming from ERISA, the Small Business Job Protection Act of 1996 (SBJPA), the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Pension Protection Act of 2006.

Although the general effective date for the regulations is January 1, 2009, several key provisions have transitional effective dates based upon a date 60 days from the publication date.

While there are a number of changes, those most critical to plan sponsors include (1) newly created written plan document requirements and (2) procedural tightening of allowable contract exchanges.

Plan documentation
The regulations require 403(b) sponsors to create written plans that, for the first time, outline the basis for how their 403(b) programs operate - such as who is eligible, whether hardship withdrawals or loans are allowed, and the names of approved companies offering investments. The regulations suggest that employers that have multiple 403(b) investment products utilize a single plan document under which the vendors’ contracts would be incorporated and coordinated.

Sponsors will also be required to annually notify all employees of their eligibility to participate in the plan.

Ultimately, employees will benefit from more transparent plan information, but the regulations will add some administrative burdens on employers. Employers will be expected to be more hands-on in managing 403(b) programs and to know more about the companies offering investments and their products.

Many employers will simplify their plans by reducing the number of insurance and investment companies serving their 403(b) program, making 403(b)s more like 401(k)s, where employers have a fiduciary duty to offer a diverse selection of investments with reasonable fees.

Transfer and exchange limitations
Under the new regulations, transfers [movement of investments from a 403(b) plan sponsored by one employer to a 403(b) plan sponsored by another employer] and exchanges [movement from one investment provider to another investment provider] will be permitted, but with limitations.

The current ruling (RR 90-24) that allows employees to transfer without employer involvement will be repealed 60 days after release of the final regulations or September 24, 2007. All transfers which have been signed into process prior to this date will be allowed, whether the assets have transferred by September 24th or not.

Also, all periodic transfers (monthly or annual over a period of five or more years) will be allowed to continue as long as they do not need to be renegotiated annually. After this date, plans may permit exchanges from one investment product to another as long as the investment company receiving the transferred amount is an approved vendor by the employer and the employer has establishes an information-sharing agreement with the new vendor. Information-sharing will include notifying the employer when the employee has separated or attained a distributable age within their plan document.

Transfers and exchanges for former employees would be permitted, provided that such individual already has established a 403(b) account into which assets may be moved. The proposed regulations had restricted transfers and exchanges to active employees only. 403(b) accounts may not be established under an employer’s plan if the individual no longer has an employment relationship with the employer.

It is somewhat unclear what the governing rules for exchanges and transfers are between September 24, 2007 and December 31, 2008, but it appears that employer involvement is required. This question has been posed to IRS.

What does it all mean?
Workers will lose some flexibility and employers will gain more administrative responsibilities. Employees currently have nearly complete control over their 403(b) account. The new regulations will force 403(b) accounts to operate more like employer sponsored plans. There may be some reduction in the number of approved vendors within the Plan, but there will be greater oversight of the vendors and investments.

Plan sponsors and providers will face more restrictions in transfers and exchanges. Employers will be forced to take a more hands-on approach, providing more structure and more oversight to their plans.

These are only a few of the changes that you and your clients need to be aware of. Click here for our prepared summary of the new regulations and interpretations. Click here  for the official IRS regulation document.

Symetra will continue to provide more information as it becomes available.