Your Plan Your Responsibility 457bDeferred Compensation Plans 403b Proposed Regulations

1. Your Plan � Your Responsibility 457(b)Deferred Compensation Plans &403(b) Proposed Regulations Presented by:Envoy Plan Services, Inc. (a Keenan Company) Atkinson, Andelson, Loya, Ruud & Romo

2. Presenters Robert Hornaday President Envoy Plan Services, Inc. 800-248-8858 www. EnvoyPlanServices.com

3. Differences of 457(b) and 403(b) Plans Administration and Compliance Regulatory Requirements 457(b) Federal Regulations California Government Code Fiduciary Liability of Plan Sponsors Establishing Your 457(b) Plan - Primary Considerations

4. June 2001 EGTRRA adopted in Washington DC May 2002 California adopts EGTRRA conforming legislation Main impact for 457(b) plans:

5. What is a 457(b) DCP Plan? An employer sponsored plan �An eligible plan is a written plan established and maintained by an eligible employer that is maintained, in both form and operation, in accordance with the requirements of IRC �1.457-4 through �1.457-10.�

6. Plan document is required Establishes the Rules of the Plan Assets owned by Employer until distributed 1996 legislation Employer has more responsibility as 457(b) plan sponsor vs. 403(b) plans Administration Compliance Employee education �Core� Investment Options (CA state statute)

7. 457(b) Plan Administration & Compliance

8. 457(b) Plan Administration & Compliance

9. Settler Functions Plan Sponsor determines eligibility and certifies eligibility for: Records kept on requests and disbursements Standard procedures checklist Limitation Testing � Basic, 3-Year Catch-up, Age 50+ Unforeseeable emergency withdrawals Monitor resumption of deferrals for unforeseen emergency withdrawals In-service distributions Separation from service distributions Rollovers, including required notification of direct rollover rights QDRO distributions and transfers Distributions to properly correct excess deferrals Rollovers to STRS & PERS to purchase service credit Loans Facts & circumstances certification of eligibility Deemed loan default eligibility Certify loan amount limits Certify loan duration limit Monitoring loan repayments Coordinate with investment provider for loans & distributions and tax reporting

10. IRC 457(b) Final Regulations Effective July 11, 2003 This overview focuses on the final regulations that are pertinent to the agenda and audience A complete copy of the final regulations can be obtained on Envoy�s web site at: www.EnvoyPlanServices.com 457(b) rules now closer to 401(k) post-EGTRRA

11. IRC 457(b) Final Regulations Administration and Compliance Responsibilities Plan-to-Plan Transfers �with same employer Transfer must be from an eligible plan to another eligible plan sponsored by the same employer Both the transferring and receiving plans must provide for transfers Transferred amount in new plan/account must be equal to the account value prior to the transfer Ongoing deferrals are predicated on continued employment with employer Catch-up Rules 3-Year Rule applies only in the last three years before Normal Retirement Age stated in the Plan Document Age 50+ Rule does not apply in any tax year in which a higher limitation applies under the 3-Year Rule Underutilized salary deferrals must be determined for all plan years beginning after 1978 in which an employee was eligible to make salary deferrals to the 457(b) plan of the employer.

12. IRC 457(b) Final Regulations Salary Deferral Contributions Salary Reduction Agreements must be entered into before the first day of the month in which compensation is paid or made available - Section 1.457-4 Excess contributions may be corrected by distributing the excess deferral and earnings by April 15th following the end of the plan year in which the excess occurred. �If an excess deferral is not corrected by distribution, the plan is an ineligible plan under which benefits are taxable in accordance with ineligible plan rules.� � Section 1.457-11 Plan Termination Sponsor may terminate the 457(b) plan in one of two ways: Terminate the plan and distribute all of the assets in the plan. Freeze the plan, do not distribute the assets and do not permit additional deferrals, and the plan must continue to comply with all regulations

13. IRC 457(b) Final RegulationsSponsoring Multiple Plans Aggregation Rules � Plan Sponsor�s Responsibilities Correction of excess contributions Applies to all sponsored plans and is considered a single plan for maximum salary deferrals and correction of excess contributions Normal Retirement Age Requires plan sponsor to have no more than ONE normal retirement age under all plans Catch-up amounts Catch-up amounts available in more than one plan Only one catch-up amount allowed Plan with the largest catch-up amount Compliance in Form and Operation Applies to all sponsored plans Must contain all material terms and conditions for benefits under the plan

14. Plan Sponsor Fiduciary Liability CA Government Code Section 53216.5 states that the Plan assets may be invested in any investment vehicle the governing body of the governmental unit (District) deems prudent. CA Government Code Section 53216.6 requires plan sponsors to act in the best interests of the participants, to act with care, skill, prudence and diligence that a prudent person familiar with such matters would employ and diversify plan assets. CA Government Code Section 53213.5(b) states that the plan sponsor may mitigate its fiduciary liability for participant directed investments conditioned upon compliance with subdivision (c) of Section 1104 of Title 29 of the United States Code for private employers. (A formal comprehensive employee education program) The provision of federal law is commonly referred to as ERISA Section 404(c).

15. Additional Fiduciary Liabilities of Plan Sponsor In a �participant-directed� environment when the 457(b) Plan complies with the protocols of ERISA 404(c)� the Plan Sponsor retains responsibility for the following: Selecting plan investment options May be delegated to a 1940 Act Manager per ERISA 3(21)(A)* The monitoring of the plans investment options May be delegated to a 1940 Act Manager per ERISA 3(21)(A)* Collecting and implementing investment instructions from participants Delegated to Plan Trustee* *Delegated by written agreement to a third party entity or individual

16. Establishing Your 457(b)Plan Primary Considerations

17. Establish 457(b) Plan Committee Oversight committee (single plan, trustee, administrator) Working committee (multiple plans) Oversight committee Awareness of responsibilities Delegate plan administration & compliance to a third party administrator Mitigate fiduciary liabilities to a 1940 ACT Investment Manager Establish procedures to oversee service providers to the plan Working committee Must assume an active and responsible role and have a working knowledge about: Federal and state regulations (structure, plan docs, fiduciary liability, etc) Responsible for coordination of administration and compliance between all plans and service providers (Settler Functions, Aggregation Rules, etc.) Required if sponsoring multiple plans

18. Adopt a single Plan Document Generic document (not provider specific) encompassing all available features under federal and state Normal Retirement Age required to be specified One Adoption Agreement Establish the Permissive Features of your Plan based on your selection of available options Written Service Agreements with each of the service providers of your Plan

19. Review your Plan�s eligibility, permissive features, and exclusions Determine if �Re-stating� your existing Plan is advisable Plan language should be kept current with legislative changes and new regulations Forms, documents, agreements and procedures must be kept current Accurate records must be maintained for possible IRS audits and for internal use

20. Who is responsible for oversight of the Plan Meeting federal and state regulatory requirements Who is responsible for meeting 457(b) Aggregation Rules: Correction of excess contributions Normal Retirement Age Catch-up amounts Compliance in Form and Operation

21. Who is responsible for oversight of the Plan Meeting federal and state regulatory requirements Who is responsible for meeting the 457(b) Aggregation Rules Who monitors compliance of Universal Eligibility Rule Who is responsible for certification and procedures for the Settler Functions for the Plan Who is responsible for ensuring that Employee Education requirements are met � whether services are provided by Plan Sponsor or investment provider Who maintains records for the Plan Certification of approval, denials and appeals for loan and distribution requests Maintains records of alternate deferral limits elected and amounts used 3-Year Catch-up participation Age 50+ Catch-up limit Catch-up contribution Ordering Rule

22. Public School Governmental 403(b) Proposed Regulations

23. Overview Public School Governmental 403(b) Proposed Regulations Significant changes to� 403(b) Tax Sheltered Annuity governmental marketplace Investment products used to fund governmental 403(b) plans IRS goal to align regulations for all voluntary retirement plans Proposed regulations 11/15/2004 Written comments accepted through 2/14/05 Open hearing occurred 2/15/05 Publish of final regulations 1st or 2nd quarter 2006 Final regulations generally effective January 1, 2007

24. Important Proposed Changes Written plan requirement for all 403(b) arrangements Like 457(b)plans, proposed regulations establish a list of qualifications that 403(b) plans must satisfy IRS now treating the 403(b) program as an employer plan New requirements for establishment of non-qualified annuity accounts (403(c)) for excess 415(c) contributions and non-vested amounts � vendor issue Repeal Revenue Ruling 90-24 transfer of 403(b) accounts and assets

25. Written Plan Regulations All 403(b) plans are defined contribution plans Written Plan Document required for all plans Plan Document must contain provisions explaining: Eligibility Benefits Contribution limits Investment products available in the Plan Time and form of benefit distributions Statement satisfying the Universal Eligibility requirements Possibility: wrap around document referring to annuity and custodial account language IRS may issue a model written plan document

26. Written Plan Regulations Plan document will determine all terms of the Plan NO underlying annuity contracts and custodial accounts Plan may prohibit loans and withdrawals even if underlying contracts/accounts permit such transactions May restrict transfer options and rollovers Both form and operation must satisfy 403(b) rules

27. Plan May Include Optional Permissive Features Hardship Withdrawals Loans Acceptance of Rollovers In-service Withdrawals Transfer of accounts and assets to another vendor and/or product approved within the Plan Plan-to-plan transfers

28. New Proposed Transfer Rules Repeal of Revenue Ruling 90-24 Only Employer Plan to Employer Plan transfers permitted Requirement that account values be as great after the transfer as before Assumes that fees for surrender charges, transfer fees, loads or other charges may not be assessed No transfers �outside� of the current Employer�s plan during employment Would have to check employer plan for �permitted vendors� before making transfers Rollovers are permitted for participants no longer working (direct transfers not permitted) Final regulations may apply more liberal rules for some transfers

29. Non-Discrimination Rules �Universal Availability� rule for elective deferrals Must be included in the Plan Document Changes IRS position on a number of issues: Meaningful Notice required of employees� right to participate must be provided to all employees annually Enrollment in the Plan must permitted no less than annually Certain employees may be excluded No change except �20 hours per week� exclusion expanded to include �employees who work less than 1000 hours per year�

30. New Withdrawal Restrictions on Employer Contributions Currently, employer contributions to 403(b)(1) annuities have no withdrawal restrictions Proposed regulations restrict withdrawals Permitted only upon �severance of employment, or a stated age, or a stated period of time� Must stipulate permitted circumstances in the Plan Document If Employer contributions and elective salary deferrals are commingled (no separate tracking) it is assumed that the more restrictive distribution rules would apply Vesting schedule is permitted in 403(b) plan

31. Elective Salary Deferrals Elective salary deferrals made under a one-time irrevocable election on or before employment, or made as a condition of employment is not an elective deferral Applies the 415(c) limit, not the 402(g) limit Elective salary deferrals can be made by �former� employee if the affected payroll period begins before employment is severed Note: IRS has promised separate guidance dealing with post severance elective deferrals for 403(b) and 457(b) in the new regulations Employees may not be able to use accumulated unused vacation and other leave payments as a source of employee deferrals May require use of non-elective employer contributions May significantly change planning in final year of service

32. Clarity of  Catch-up Contribution Rules Only elective deferrals are counted in determining the prior contribution average of $5,000 per year Confirms that 457(b) salary reduction contributions are not counted (not elective deferrals) Ordering Rule: Employees eligible for both 15 year catch-up limit & Age 50+ catch-up�are considered to first use the 15 year catch-up ($3,000 annual-$15,000 lifetime max) The Age 50+ catch-up limits do not affect the 415(c) limit ($42,000 in 2005) Years of service are counted only with current employer (determined by who pays the employee)

33. Implications of Separate Account Requirements Excess 415(c) Contributions Excess 415(c) annuity contributions must be placed in a separate account and treated as a non-qualified annuity under Section 403(c) 403(b)(7) custodial accounts excess contributions are subject to the rules of IRC sections 61, 83, or 402(b) Will affect vendors and products in the marketplace Changes and re-filing of contracts and prospectuses Systems changes for vendors Inability of the vendor to create separate accounts for excesses disqualifies the entire 403(b) contract/custodial account Some vendors may not choose or be able to satisfy this requirement

34. Investment Restrictions Limited to Annuity Contracts and 403(b)(7) Custodial Accounts Life Insurance contracts issued after February 14, 2005 are not considered to be �annuity contracts� NOT permitted Also excludes use of endowment contracts Elimination of life insurance under 403(b) annuity contracts will have significant impact On clients seeking to purchase life insurance On representatives and companies that sell life insurance inside of 403(b) annuities Note: Contracts issued before 2/15/05 would be grandfathered. Effective date problematic since regulations cannot be relied upon.

35. Terminated and Frozen Plans Employers would be permitted to terminate their 403(b) Plan and make distributions from the terminated Plan without violating the restrictions on early distributions Board Resolution or Directive Distribute Plan assets to participants No future contributions to another 403(b) Plan with the same Employer for 12 months after all assets are distributed Must follow all other applicable regulations Employers may �freeze� their 403(b) Plan Not permit future contributions May restrict participation to only current employees and participants Unclear how this would violate the Universal Availability rule or be an exception

36. Other Issues Officially applies QDRO rules to 403(b) plans Must be included in Plan Document and contracts Distributable Event not required for QDRO distribution Requires that elective salary deferrals be remitted1 to the 403(b) vendor as soon as administratively possible Suggests standards of no later than 15 business days in the month following reduction of salary State regulations may apply stricter standards May require changes to Employer�s procedures Roth 403(b) regulations soon to be issued Look to Roth 401(k) rules for now

37. Key Concept to Understand IRS now treating the 403(b) program as an employer sponsored plan with all control at the employer level

39. The End