403(b) Retirement Plans Must Be Amended Before 2009
Steve Gerlach | October 8, 2008
New IRS regulations require that most 403(b) retirement plans must be amended this year. If a 403(b) plan is not amended before 2009 to comply with the new regulations, it is possible the plan could lose its tax-exempt status. Only governmental employers, churches, and non-profit organizations can sponsor a 403(b) plan. Under the new regulations, the key changes that must be made and become effective on January 1, 2009, are as follows: The 403(b) plan must be stated as a written plan document, and the employer must operate the plan in compliance with the written document. Certain so-called “safe harbor” rules that in the past have protected 403(b) plans from inadvertently violating federal coverage requirements and other discrimination requirements will be repealed. New definitions of what constitutes a “controlled group” (that is, corporations or other entities connected to an employer) will go into effect. This may result in expanding employee coverage and nondiscrimination testing for some 403(b) plans. New restrictions on 403(b) plan distributions to employees will become effective. 403(b) plans will no longer be able to own separate life insurance policies or offer certain other types of “incidental benefits” to employees. A 403(b) plan’s ability to exchange annuity contracts will be restricted.
403(b) plans will be able to be terminated in a manner similar to 401(k) plans. To meet the January 1 deadline for these changes, your 403(b) plan should be reviewed as soon as possible. The review should include not only the plan document itself, but also any other key documents that are part of the plan, such as annuity and other insurance contracts, custodial accounts, enrollment forms, distribution forms, union contracts (if union employees are covered by the 403(b) plan), and administrative service agreements. In addition, you should contact your service providers to confirm they will be able to provide the administrative support that will be needed to comply with the new regulations.
An employer should also have written procedures that are followed to comply with the new requirements, especially procedures to satisfy the nondiscrimination rules, distribution restrictions and benefit requirements. To request a review of your 403b plan or for more information, please contact Steve Gerlach or any member of Bernstein Shur's Tax, Trusts, and Estates Group at (207) 774-1200.
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