Peery & Associates, Inc.

April 17, 2008, by Catherine M. Peery, Peery & Associates, Inc. www.ben-e-fit.com

IRS regulations released in July of 2007 impose substantial new requirements and fiduciary responsibilities on employer sponsors of 403(b) plans. The regulations are effective January 1, 2009, although some provisions are already applicable. The new rules may significantly increase the burden of maintaining a 403(b) Plan making it more expensive than maintaining a 401(k).

Under the new regulations:

All 403(b) plans, ERISA or non-ERISA, will be required to have a written plan document.
A plan that includes an employer match or that limits investment options will now fall under ERISA, unless the plan sponsor is exempted. Exempted employers are public schools, government sponsored hospitals or museums, and churches.
Universal availability, which sates all employees are immediately eligible for the 403(b) deferrals, will be enforced.
All 403(b) contracts purchased for an employee by an employer must be treated as a single contract for the purposes of loans and hardship provisions, required minimum distribution rules, and lump sum distributions. If a single contract fails to satisfy certain 403(b) requirements, then all contracts purchased for that individual by the employer will fail to qualify for tax deferral - the balance of the contracts becomes taxable if not resolved by July 2009, with some exceptions.
Deferral-only non-ERISA 403(b) plans. Even these plans will now have a document requirement, contract exchange and transfer rules applicable now , and enforcement of universal availability. There will no longer be unlimited and unmonitored exchanges among 403(b) investment products. Instead, employers will need to know where all their contracts are, to become aware of various restrictions and take steps to enforce them.

As 401(k) plans were not available to nonprofit organizations before 1996, many are not aware of the advantages of a 401(k) plan. A 401(k) plan can be designed to exclude certain employees, to have eligibility with a maximum 1-year wait for the 401(k) portion of the plan, and vesting. Employer contributions can easily be incorporated into a 401(k) plan, combining administration of employer and employee contributions. The 401(k) plan has lower administrative burdens at a lower cost than most 403(b) plans or arrangements.

Peery & Associates, Inc. has approved prototype documents for 403(b) and 401(k) plans, and competitive administration fees. In conjunction with www.403basp.com , we can provide online access for plans with multiple vendors and retirement investment education tools for your participants. You are free to keep your current vendors or choose among Vanguard, Oppenheimer, Schwab, and many others, all within one online platform.

For more information please call or e-mail Catherine Peery, Catherine@ben-e-fit.com, 650-879-0150.