Section 403(b) annuity plans have historically been governed by a hodgepodge of Internal Revenue Service ("IRS") rulings and regulations dating back to 1964. In 2007, however, the IRS finalized new, comprehensive regulations that are generally effective January 1, 2009. Schools and tax-exempt employers that maintain 403(b) plans and their advisors must thoroughly review and revise their plans to comply with the new regulations. The consequences of not doing so are dreadful (i.e., the loss of tax-deferred status of employer and employee contributions to the annuity plan).
One significant change under the new regulations is the requirement that all employers maintaining a 403(b) plan must have a formal, written plan document. This document must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefit distributions will be made. It also should include provisions concerning hardship distributions, loans, and rollovers.
Another critical feature will be the need to establish an appropriate information sharing and administrative services agreement between the employer and the annuity providers. Finally, although not part of the IRS regulations, some employers may be subject to enhanced reporting (Form 5500) and audit requirements as well.
The time to start planning is now because the required documentation must be in place by December 31, 2008. Preparing appropriate plan documents and other plan agreements must be a coordinated effort among the employer, its advisors, and the annuity providers.
For further information, please contact David Paik at (213) 617-4196.
Any tax advice herein was not intended or written by the author to be used, and it cannot be used by any recipient, for the purpose of avoiding any tax penalties that may be imposed on any person. There is no limitation imposed on a recipient hereof by the author hereof on disclosure of the tax treatment or tax structure of any transaction. Except with prior written consent of the author, nothing herein may be used or referred to in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any person.