IRS Issues Final 403(b) Regulations
August 13, 2007
On July 23, the IRS issued finalized regulations under Section 403(b) of the Internal Revenue Code. These final 403(b) regulations replace the original regulations that were issued in 1964 and apply to all 403(b) plans, at least in part, including government, church and non-ERISA salary reduction only (TDA) plans. The new regulations will generally apply in taxable years beginning after Dec. 31, 2008.
Immediately after they issued the final regulations, the IRS posted a new homepage for 403(b) plans on their website that provides links not only to the new 403(b) regulations and the IRS’ own summary and presentations on the new regulations, but also links to a wide range of other IRS publications for 403(b) plans.
The new final regulations are much like the proposed 403(b) regulations. Some of the differences in the regulations that apply to 403(b) plans and 401(k) plans will, however, be diminished. The new regulations will:
- Require all 403(b) plans, including non-ERISA TDA plans, to be in writing.
- Limit direct transfers to authorized funding vehicles only. Transfers to funding vehicles that are not authorized under the plan will not be permitted after Sept. 24, 2007 unless the vendor and employer agree to share information related to tax compliance. (This replaces the prior rule under IRS Revenue Ruling 90-24, which generally allowed a participant to make a direct transfer to any 403(b) annuity contract, even one that was not one of the plan’s approved funding vehicles.)
- Limit in-service distributions of employer contributions to a 403(b)(1) annuity prior to a triggering event, such as those that currently apply to 403(b)(7) mutual funds and 403(b)(1) elective deferrals.
- Eliminate good faith and safe harbor alternatives to statutory nondiscrimination testing of 403(b) retirement plans formerly provided by Notice 89-23.
- Apply the controlled group rules to tax-exempt entities, which will complicate nondiscrimination testing of 403(b) plans for some institutions with multiple locations.
DOL guidance: The Department of Labor (DOL) issued a Field Assistance Bulletin (FAB) on July 24 spelling out how the new final 403(b) regulations issued by the IRS will affect the exemption from ERISA for certain 403(b) tax-deferred annuity (TDA) plans.
According to DOL FAB 2007-02, the new 403(b) regulations have not led the DOL to change its view that TDA plans can be exempt from ERISA even though they must now satisfy the new written plan and direct transfer requirements contained in the final IRS 403(b) regulations. But certain new requirements spelled out in the FAB must be satisfied in order to qualify for the ERISA exemption.
© 2007 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), New York, NY 10017