New 403(b) Regulations

1. New 403(b) Regulations Pete Gautreau, CPA Partner Danielle Witten, CPA Senior Manager

2. Agenda • New 403(b) plan regulations • Why the change? • What’s different? • Common mistakes • Steps to take now

3. New 403(b) Plan Regulations • Written plan document • Universal availability • Changed transfer rules • Timing of contributions • Coordinated catch-up rules • Plan terminations

4. Why the Change? • Diminish extent to which the rules are different from other tax-favored employer-based retirement plans such as • 401(k) • 457(b)

5. Written Plan Document • Key Dates • Original deadline was 1/1/09 • IRS Notice 2009-3 extended deadline to 12/31/09 • What this means • Written plan document must be adopted and signed by 12/31/09

6. Written Plan Document (cont.) • What this means (cont.) • Plan must operate in accordance with a “reasonable interpretation” of 403(b) • Plan document must intend to satisfy the new regulations • Employer must make its “best effort” to retroactively correct operational failures before 12/31/09

7. Written Plan Document (cont.) • Essential Elements • Eligibility requirements • Available investments • Dollar Limitations • Basic plan features • Benefits • Time and form of distributions

8. Written Plan Document (cont.) • Optional Elements • Loans • Hardship withdrawals • Elective deferral catch-ups • Transfers • Terminations

9. Written Plan Document (cont.) • Other Recommendations • Plans may incorporate other documents into written plan by reference • Annuity contracts • Custodial agreements

10. Written Plan Document (cont.) • Revenue Procedure 2007-71 • Issued 11/27/07 • Effective 12/17/07 • Includes model plan language for public school use • Plan document will meet requirements if use model language or language that is “substantially similar”

11. Loans • Rules • Appropriate dollar limits • Lesser of $50,000 or 50% of vested account balance • Amortization not to exceed 5 years (unless used to purchase a principal residence) • Repayments must be made at least quarterly • Fail to meet legal requirements • Deemed distribution • Subject to income taxes

12. Loans (cont.) • Before • Direct relationship between participant and investment provider • Participant sent loan repayments directly to investment company • After • Payroll deduction, just like a 401(k) • Plan sponsors will be aware of defaulted loans

13. Hardship Distributions • Must meet one of the following hardship requirements: • To purchase a principal residence • To prevent eviction from, or foreclosure on, the principal residence • To pay certain medical expenses • To pay certain education expenses • Participant must also exhaust all other sources of financing first

14. Hardship Distributions (cont.) • Before • Directly from investment company • After • Through the plan sponsor • Must enforce 6 month rule • No deferrals for 6 months after receiving a hardship distribution

15. Universal Availability • All employees must be able to participate • May only exclude the following: • Students • Non-resident alien • Employees covered by another similar plan • Employees normally working < 20 hours per week

16. Universal Availability (cont.) • The following are not excluded: • Collective bargaining employees • Visiting professors • Employees who have taken a vow of poverty • Employees who make a one-time election to participate in a governmental non-403(b) plan

17. Universal Availability (cont.) • Effective opportunity required • Notice of opportunity to participate • Notice of election timing • Opportunity to change at least once per year • Universal availability generally applies to • Each common law entity (each 501(c)3 organization) • Each entity not a part of a common payroll (state entities)

18. Transfer Rules/Exchanges • Old 90-24 transfers not allowed after September 24, 2007 • Tax-free exchanges can be made only to: • Providers you have approved • Plan of another employer • Information Sharing Agreement should be in place

19. Transfer Rules/Exchanges (cont.) • Information Sharing Agreement (ISA) • An agreement to share information sufficient to ensure compliance with respect to the following: • Loans • Hardship distributions • Distribution events • Recovery of basis in the contract

20. Timing of Contributions • No absolute deadline from IRS • Contributions must be remitted to vendors as soon as administratively possible • What does this mean? • Payroll is run • Funds can be segregated

21. Catch-up Rules • Special 15-year catch-up rules • Complex requirements • 15 years of full-time service with same employer • Age 50 contribution • 15-year catch-up must be used first

22. Catch-up Rules (cont.) • Example • 2008 regular deferral limit $15,500 • 2008 annual 15-year catch-up (max.) $3,000 • 2008 age 50 contribution $5,000 • Maximum potential contribution for employee in 2008 is $23,500

23. Plan Terminations • Employers may terminate both active and frozen 403(b) plans • Employers may want to consider the following: • Consult legal counsel to evaluate required documentation needs • Establish process for employee distributions and rollovers • Communicate with employees

24. Common Mistakes • Failure to: • Follow provisions in plan document • Properly apply universal availability • Limit employee elective deferrals • Timely return excess elective deferrals and earnings • Identify and report defaulted loans • Satisfy hardship distribution requirements

25. IRS Focus in 2009 • Existence of written plan document • Amendment of existing plan to comply with final regulations • Operating in accordance with written plan document • Universal availability

26. Steps to Take Now • Make sure the plan has a current, written plan document • Identify all plan service providers • Legal counsel • Investment companies • Investment committee • Human resources

27. Steps to Take Now (cont.) • Establish policies and processes to ensure proper authorization and record keeping of plan transactions: • Investments • Contributions received and related receivables • Benefit payments • Participant data and plan obligations • Administrative expenses

28. Steps to Take Now (cont.) • Develop a written investment policy that addresses the following: • The types of investments the plan can make • Appropriate authorizations for investment transactions • How often the investment options should be reviewed

29. Questions?

30. Thank you! e-mail hotline: Abbi Palsma apalsma@vlsllp.com