As announced in the previous edition, the Internal Revenue Service (IRS) has issued major revisions to the regulations governing 403(b) tax-deferred annuity plans. Generally, these revisions bring section 403(b) plans into closer alignment with the rules governing 401(k) and 457(b) plans. Because the new regulations turn 403(b) arrangements into employer-sponsored plans, these revisions mark a significant change in the administration of 403(b) plans. Moreover, while most of the changes don't go into effect until January 1, 2009, two of the changes became effective September 24, 2007.

After September 24, 2007, the investments listed below may not be made through a 403(b). Contracts of these types issued before September 24 will be grandfathered, under the new rules.

• Life insurance contract
• Endowment contract
• Health or accident contract
• Property casualty or liability contract

Death benefits that are part of an annuity contract issued by an insurance company are permitted, as long as the death benefits do not cause the contract to fail to meet any other requirement of section 403(b) and the incidental death benefit rules are followed. Waiver of premium provisions that continue contributions to an annuity during an employee's long-term disability are also still permitted if they satisfy incidental death benefit rules. The other early change in the regulations concerns contract exchanges. Tax-free transfers have been significantly restricted under the new regulations. Plan-to-plan transfers between the section 403(b) plans of two different eligible 403(b) sponsors will be permitted between September 25, 2007 and January 1, 2009 if:

• The individual whose assets are being transferred is an employee, former employee or beneficiary of an deceased employee of the employer sponsoring the receiving 403(b) plan;
• Both written plans (written before January 1, 2009) allow for the transfer;
• The value of the accumulated benefit before the transfer equals that after transfer; and
• The receiving plan provides distribution restrictions at least as stringent as the transferring plan. Contract exchanges within the same plan will be permitted if:
• The written plan (written before January 1, 2009) permits it;
• The value of the accumulated benefit before the transfer equals that after transfer;
• The receiving plan provides distribution restrictions at least as stringent as the transfer ring plan, and;
• The employer and the new vendor enter into an information-sharing agreement for compliance purposes.

Written Plan Requirement

Perhaps the most fundamental change in these new regulations is the requirement that an employer offering a 403(b) plan adopt a written plan that complies with section 403(b) and the accompanying regulations by January 1, 2009. While this requirement is more than a year away from implementation, because the plan-to-plan transfer requirements depend on the written plan, it is important for employers to start thinking about written plans now. According to the regulations, the written plan must contain all mandatory and optional provisions of the plan.

Mandatory provisions include those governing eligibility, benefits, applicable limitations on contributions, the contracts offered and the time and form under which benefit distributions will be made. If offered, the optional provisions of the plan, such as hardship distributions, participant loans, plan-to-plan transfers, rules for contract exchanges and acceptance of rollovers into the plan, must also be included into the written plan.

The IRS has indicated that it is in the process of preparing a Revenue Ruling providing language that can be used by plan sponsors in developing their written plan. In preparing a written plan, employers will need to take care that they do not unwittingly subject their plan to Title I of ERISA. This is one reason for employers to develop and use plan documents that identify the parties, spell out the employer’s limited role, and allocate discretionary authority to a third party.

In the coming weeks and months, Keenan will keep you informed of additional provisions in the new 403(b) regulations and any changes in the IRS implementation of them.

If you have any questions concerning these regulations, please feel free to contact Robert Hornaday, President of Envoy Plan Services at Keenan & Associates, 800-248-8858 or rhornaday@keenan.com