Forty-Three Years in the Making--Final 403(b) Regulations Released

August 9, 2007

On July 26, the Internal Revenue Service (IRS), for the first time since 1964, published final regulations governing 403 (b) pension plans. The final rules apply to all 403 (b) pension plans, including government, church, and non-ERISA tax-deferred annuity plans. The regulations are effective for taxable years beginning after December 31, 2008, and include the following requirements:

Written Plan Document. The final regulations require a written plan document for every 403(b) plan. In recognition of the fact that most 403(b) plans are administered through outside vendors, the regulations permit a plan document to incorporate by reference other materials, such as, annuity contracts, custodial accounts, or summary descriptions. However, employers must adopt a single plan document stating the eligibility requirements and coordinating the administration of the plan(s) among multiple 403(b) vendors

Exchanges and Transfers. The final regulations impose new requirements or investment changes among 403(b) contracts under the same plan. Such exchanges are permitted only when certain requirements are met, including those stipulating that the plan provide for the exchange and that the employer enters into an information sharing agreement with the issuer of the new 403(b) contract.

Universal Availability. The final regulations include clarifications related to the universal availability requirement, including eliminating several exemptions from the requirement and providing guidance on the treatment of part-time employees (i.e., visiting professors, camp counselors, etc.).

ERISA. The Department of Labor published Field Assistance bulletin 2007-02 in connection with the final regulation, which generally provides that a plan of a tax-exempt employer may satisfy the requirements of the final 403(b) regulations and remain exempt from ERISA.

In-Service Distributions. The regulations restrict in-service distributions to amounts attributed to employer contributions to a 403(b) annuity contract issued by an insurance company. Contracts issued before January 1, 2009, are grandfathered into previous rules.

Plan Termination. For the first time, the final regulations officially allow an employer to terminate a 403(b) plan. An employer is immediately able to replace a terminated 403(b) plan with a 401(k) plan or a 457(b) plan.

For more information, see these additional resources:

NACUBO Contact: Mary Bachinger, director tax policy, 202-861-2581