Penalties For Noncompliance
What happens if my institution’s plan does not comply with the final 403(b) regulations?
The final regulations address the effects of a failure to satisfy the requirements of 403(b) and the regulations:
- Contract Failure—All contracts purchased for an employee are to be treated as a single contract for purposes of 403(b). If any contract fails to satisfy any of the 403(b) requirements, then all contracts purchased for that individual will fail to qualify for tax deferral under Section 403(b). Most operational failures solely within a single contract, for example, contribution limits, distributions, etc., will not adversely affect other participants but will generally disqualify all contracts of the affected participant provided under the 403(b) plan.
- Plan Failure—All contracts issued under an employer’s plan will be disqualified if the employer is not an eligible employer, if there is no written plan or if the nondiscrimination rules are not satisfied.
- Separate Bookkeeping for Excess Contributions and Vesting – Contributions in excess of the 415 limit will not disqualify the entire contract provided the issuer maintains separate bookkeeping accounts for the portion that exceeds the limit. Separate bookkeeping is also required for each type of contribution that is subject to a different vesting schedule.