403(b) Outlook: Information Sharing Agreement Requirements
April 02, 2008
What is the rule? After Sept. 24, 2007, contract exchanges to funding vehicles issued by vendors not approved to accept contributions under the plan ("non-payroll slot" vendors) will not be permitted unless the employer and the unapproved vendors agree that they will enter into an information sharing agreement by Jan. 1, 2009. (Treasury Regulation Section 1.403(b)-10(b))
Requirements: Under an information sharing agreement, the employer and the unapproved vendor agree to provide each other from time to time with the information that is needed to ensure the plan’s compliance with the requirements of the IRC and final regulations. The information that needs to be shared includes such things as a participant’s employment status, eligibility for hardship distributions and plan loan limits. The regulations make it clear that vendors no longer will be able to rely on the participant for information in the way permitted currently.
Approved vendors (those with "payroll slots") do not have to enter into separate information sharing agreements because the regulations assume that these vendors and the employers already are sharing information. Keep in mind that you will not need a separate information sharing agreement if your plan already limits transfers to only approved vendors.
What has changed? Information sharing agreements were not required before the final 403(b) regulations were issued. Under Revenue Ruling 90-24, direct transfers between 403(b) contracts and custodial accounts were permitted as long as the successor contract or custodial account included distribution restrictions that were the same as or more restrictive than the contract or account that was being exchanged.
Effective date: An information sharing agreement must be in place by Jan. 1, 2009, for exchanges to unapproved vendors after Sept. 24, 2007.
What happens if you fail to comply? After Sept. 24, 2007, contracts issued by an unapproved vendor will not be a valid 403(b) contract unless there is an information sharing agreement in effect on Jan. 1, 2009. If an employee does an exchange after Sept. 24, 2007, with an unapproved vendor that has no information sharing agreement on Jan. 1, 2009, the accumulation in the contract issued by the unapproved vendor could become fully taxable. Recent IRS guidance permits an employee to "re-exchange" a contract issued by an unapproved vendor with no information sharing agreement for a contract of an approved vendor if done by July 1, 2009.
Read more about contract exchanges/plan-to-plan transfers.
Next week’s issue: Elective Deferral Ordering Rule