403(b) Outlook: 403(b) Plans Subject to Statutory Nondiscrimination Tests

March 03, 2008

403b Outlook Archive 403(b) Outlook Archive

What is the rule? Effective Jan. 1, 2009, the reasonable, good faith testing standards and safe harbors of Notice 89-23 will no longer be available. This means that noncontributory 403(b) plans, i.e., plans funded solely with employer non-elective contributions, must satisfy the same Internal Revenue Code Section 410(b) Minimum Coverage and the Section 401(a)(4) General Nondiscrimination Tests that apply to qualified 401(a) retirement plans. The safe harbors (described below) that were available to 403(b) plans under the Notice will no longer be available. In addition, voluntary contributory plans that are age- or service-graded matching plans will have to test each grade to make sure they are available on a nondiscriminatory basis. (Section 1.403(b)-5(a))

What has changed? Notice 89-23, issued in 1989, provided transitional guidance for 403(b) plans that were subject to retirement plan nondiscrimination testing for the first time. According to IRS Notice 89-23, noncontributory 403(b) plans that meet one of the disparity safe harbors provided in the Notice are exempt from the statutory minimum coverage and general nondiscrimination requirements. In addition, Notice 89-23 permits 403(b) plans to use a reasonable good faith interpretation of the statutory nondiscrimination testing requirements.

Although it has been close to 19 years, Notice 89-23 was never intended to be a long-term method of nondiscrimination testing for 403(b) plans. Effective Jan. 1, 2009, the final 403(b) regulations repeal Notice 89-23 and, as a result, both of these rules.

Effective date: Plan years beginning on or after Jan. 1, 2009.

What happens if you fail to comply? A failure of the nondiscrimination requirements results in a possible disqualification of a 403(b) plan. If the plan is disqualified, all contracts for all participants in this plan will become taxable and included in the employee’s gross income.

Learn more
Read about IRS Notice 89-23 safe harbors, 410(b) Minimum Coverage Test, 401(a)(4) General Nondiscrimination Test and the 401(m) Matching Test.

You may also contact your TIAA-CREF representative for more information.

Next week’s article: Timing of contribution remittances


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