In 2007 the Treasury Department and the IRS released new regulations related to retirement savings arrangements sponsored by public schools and charitable organizations, often referred to as 403(b) plans.
The 403(b) regulations underwent a comprehensive overhaul in effort to modernize the rules (which were written largely during the 1960s and modified in patchwork fashion numerous times since) and to make a 403(b) function more like the familiar 401(k).
Following is an overview of how the key changes will affect 403(b) plans, participants and carriers. If you are actively selling or servicing 403(b) TSAs with The Standard, you will receive a separate communication specifying procedures to ensure your clients stay in compliance with the law.
Key Differences
The following details some key changes to the establishment and administration of 403(b) plans and annuity contracts.
Written Plan
- Previously a carrier’s annuity contract typically functioned as the plan document.
- Now each plan must have its own written plan. Although the written plan may consist of multiple documents (one of which might be the carrier’s annuity contract), the new written-plan requirement is so detailed that it will almost always require a new, unique document to be prepared by the plan sponsor.
The Bottom Line
All 403(b) plan sponsors must have a written plan in place by January 1, 2009.
Vendor Restriction
- Previously a participant had a great deal of flexibility in determining where to invest his account. He could move funds without a distributable event (such as severance from service or attainment of age 59½) and even have multiple accounts, opened with current and former employers. It was likely under this setup that the plan had little or no idea where many of its participants’ funds were held. This arrangement created the impression that a 403(b) account was more like an IRA than a 401(k), where the participant could open the account, put away a certain percentage from each paycheck and move funds from one carrier to another whenever it suited him.
- Now for a participant to have the option of ongoing contributions the plan sponsor must name the carrier in its written plan as an approved vendor. And if a participant wishes to make a one-time rollover, transfer or exchange to a carrier that is not named as an approved vendor, the plan sponsor must sign an information-sharing agreement. The Standard, like most carriers, will not accept new 403(b) contributions, rollovers, transfers or exchanges without first being named as an approved vendor in the written plan or having obtained a signed information-sharing agreement.
- For Ongoing Contributions
The Standard will open a 403(b) account and accept funds only upon confirmation that we are named as an approved vendor in the plan sponsor’s written plan and a copy of the written plan is provided. - For One-time Rollover, Transfer or Exchange
The Standard will open a 403(b) account and accept funds only upon confirmation that we are named as an approved vendor in the plan sponsor’s written plan or that we have a signed information-sharing agreement on file and a copy of the written plan is provided.
- For Ongoing Contributions
The Bottom Line
For ongoing-contribution contracts, The Standard must be named as an approved vendor in the written plan. For rollovers, transfers and exchanges where The Standard is not named as an approved vendor, an information-sharing agreement must be on file.
Sponsor Accountability
- Previously when a participant initiated a distribution, loan or hardship withdrawal it’s likely the plan sponsor was unaware of the request, let alone of the conformance to IRC requirements.
- Now the plan sponsor is responsible for ensuring that all 403(b) rules are met (similar to the accountability limiting contribution). The new regulations require the plan sponsor to be responsible for:
- verifying a distributable event;
- confirming loan rules are met;
- approving hardship withdrawals; and
- authorizing rollovers, transfers and exchanges.
