BOB ARCHITECT, 12/4/2008:

Stay tuned over next 2 to 3 weeks for further guidance re 1/1/2009 effective date regarding requirement for written 403b plan document and perhaps a RAP (remedial amendment period).

New control group rules for tax exempt entities take effect 1/1/2009, and apply to all employee benefit plans sponsored by such entities, including 403b plans.

Rev Proc 2007-71 with "model" plan language for use by public schools, "sample" plan language for other 403b eligible employers. There will be no further model/sample plan language to address any other issues, such as employer contributions.

IRS is prepping a 403b prototype plan document program (expected sometime in 1st half of 2009), and a determination letter program for individually designed 403b plan documents (later). The IRS will publish 65-70 pages of suggested language, first for the prototype plans and then for individual designs, as part of a Rev Proc--hopefully in the next few weeks (hopefully before the end of 2008). Such will address Roth deferrals and tax-exempt orgs structuring non-elective matching and non-matching contributions from the ER. There will be a 45 day public comment period.

EPCRS (Rev Proc 2008-50) will be updated for 403b plans, for failures to comply with the new 403b regs taking effect 1/1/2009. None of the current EPCRS procedures apply to failures re the new 403b regs.

MYTH BUSTING: MYTH #1: Info Sharing Agreement-if ER doesn't have an ISA in place with the vendor of an EE's 403b contract, the 403b contract will be taxable or subject to other problems. ISAs only appear in one reference in the new Treas Reg § 1.403(b)-10, in addressing 90-24 in-service, under age 59 1/2 exchanges. Only a 403b plan that permits such exchanges would need any ISAs from vendors approved to receive such exchanges.

Section 6.04(a)-(d) of the model plan language (Rev Proc 2007-71) is an example of in-service exchanges. A 403b plan need not allow such in-service exchanges. If a 403b plan does not, then that 403b plan needs no ISAs.

Treas Reg § 1.403(b)-3(b) allows a 403b plan document to specify the allocation of compliance responsibilities. The ER can infuse such allocation language in an ISA, but it could be by other agreements and documents.

MYTH #2: If an ER is parsing down the # of vendors incident to its compliance efforts, some 'approved' vendors are sending EEs letters that they must exchange their 403b contracts to an 'approved' vendor by 12/31/2008 or else their 403b contracts will be taxable. Truth: Only future contributions need to go to an 'approved' vendor to avoid income taxation.

MYTH #3: Public schools (K-12 and public colleges, universities) will become ERISA fiduciaries and must file f5500s. Truth: State or local law, possibly, but not under ERISA.

MYTH #4: An ER that freezes contributions (not terminate the plan) does not need a written 403b plan. Truth: A written 403b plan document is needed for a 403b plan on the effective date of the new 403b regs. This is true even if the 403b plan has only previously accepted salary reductions.

MYTH #5: The 403b regs restrict EEs' right to rollover their benefits. Truth: In-service exchanges are now limited (as 90-24 exchanges were made obsolete by the new 403b regs), but rollovers following an access event remains the same.

MYTH #6: Treas Reg § 1.403(b)-11, delayed effective dates apply to any church or to any public school with a CBA. Truth: the only time a church 403b plan effective date only is delayed if the 403b plan is a product of a church "convention" (not for independent churches). Only public schools with a CBA in place on 7/24/2007 that called for the maintenance of the 403b plan by the public school get the delayed effective date.

LOOMING PITFALLS

Adopting 403b plan document. Memorializing in writing the formulation or putting into effect the plan. There needs to be language and signatures by which the ER adopts the plan document.

Bad Terminations. For the first time, the new 403b regs describe favorable tax consequences of terminating a plan 'if you can go down that road'. Plan termination is administratively and timely liquidation and distribution of all plan assets. Problem for 403b plans with individual custodial accounts (403b7 accounts): the ER is not in a position to require the payout of the assets held in those custodial accounts. The ER may have no power to force the payout, and ALL of the plan assets must be liquidated/distributed in order to terminate the 403b plan. What is the favorable tax consequence of being able to terminate a 403b plan? It makes eligible for rollover the 403b contract benefits of those active employees under age 59 1/2. If you cannot terminate, those active employees under age 59 1/2 may not roll their 403b benefits outside the context of a 403b contract. Section 8.03 of the model plan language (Rev Proc 2007-71) reflects this reality that termination is subject to the terms of the individual 403b contracts. 'Your structure of 403b plan may not permit you logistically to pursue a termination.'

The big 403b unique advantage: 403b permits the ER to make non-elective ER contributions into a former EE's 403b contract for five years after employment terminated, up to the 415c limit (e.g., $49,000). This must be non-elective by the EE. E.g., EE cannot receive such contributions in lieu of unused vacation pay at the time of termination. That would be a cash or deferred election by the EE, and that is not possible to do so post-employment. The 5-year provision is limited to non-elective, ER contributions.

Q&A:

#1: Large ERISA plans are subject to audit.

#2: SD has 4 vendors, not going to use any of the 4 after 2008. Going instead with a new vendor for 2009 and beyond. What are 403b plan document requirements re the 4 disenfranchised vendors? Section 8.01 of Rev Proc 2007-71. As to vendors 'dismissed' in 2004-08, ERs need to make a minimalist, 'reasonable, good faith effort' (whether successful or not) by exchanging contact info between the ER and vendor. That brings the vendor within the 'new, shiny plan'. Plan need not list the vendors, but may simply refer to separate listing that is updated as needed.

#3: Post-2008 contract exchanges. Contract from non-approved to an approved vendor. EEs may certainly do so. Section 6.04 of Rev Proc 2007-71.

#4: What is a church "convention"? Periodic meetings, such as once or twice a year, and the delayed effective date is to accommodate possible meeting schedules.

#5: Consequences of failure. Treas Reg § 1.403(b)-3 Plan-wide failures; individual employee failures.

INFORMATION DISSEMINATION "TOOLS"

Two resources. www.irg.gov, then Retirement Plans Community, then Types of Plans, then 403b Plans.

Newsletter: Employee Plans News, www.irg.gov, then Retirement Plans Community, click on newsletters and then subscribe.

Thanks for this, John.

Assume you were a betting man--did you get a feel that there will be an extension for producing a plan document before year-end?

Bob seemed optimistic that before year's end there would be some additional guidance on the plan document effective date.

Given that we are T-minus 27 days, this is starting to look like a game of chicken. How much longer will those ERs without a 403b plan document sweat it out and see if the IRS blinks?

My 403b clients are already all documented up, given the schedules of monthly board meetings and advance agenda and document posting before taking action.

Notice, Larry, I didn't answer your question. Betting man? 3:2 odds right now that the IRS will blink before 1/1/2009. Going into the phone seminar today, I was down around 3:1 against it happening. Oh--did I say I wasn't a betting man?

I was more optomistic before the ASPPA webinar yesterday simply because Bob Architect spoke at both. So in two days, he had two opportunities to announce an extension, and did not do so.

I thought today's webcast was very interesting.

Bob opened the webcast with discussing the extension, which shows how important this issue is. I then thought he parsed his words by saying that they have received comments, and will have a response to those comments within the next 2-3 weeks.

By my count, Dec. 4th plus 3 weeks is Dec. 25th (Thursday). Most offices are planning on closing Friday, Dec. 26th. That means an extension would only be a reprieve for the (hopefully) very few plan sponsors who waited until the last 3 days of the year to adopt a written plan which complies with the Final 403(b) Regs.

Anyone want to start a pool on when the announcement, either yea or nay, is going to be made.

Nice job on the summary John.

Thanks

Thanks John!

Thanks a lot, John.

It's hard to imagine, given the message that Bob is sending every chance he gets, that some sort of deadline relief is not imminent. Maybe the RAP program is going to replace the deadline altogether?

He made a point of emphasizing that the RAP will not replace the deadline; but who knows...

John:

Bad terminations: What is the problem for individual 403(b)(7) accounts?

If an employer terminates a 403(b)(7) plan what prevents the custodian from resigning and giving particpants 60 or 90 days notice to transfer their funds to another account? If the funds are not transfered the custodian can send the funds to the participant. Why would a custodian not resign if the plan is terminated?

Every custodial agreement I have ever seen gives the custodian the unrestricted right to terminate the agreement and distribute the funds.

As Bob Architect has repeatedly pointed out, under those individual 403b7 custodial agreements between the custodial institution and the employee, the employer usually does not have the unilateral legal authority to order that distribution from the 403b7 custodial account be made. If each and every custodial institution and each and every employee will agree in advance and give the employer that legal right to order distribution out of the 403b7 context incident to the employer terminating the 403b plan, then the employer can proceed to terminate its 403b plan. In that instance, the employer has greater assurances that ALL the 403b plan assets will be paid out/rolled over within an administratively reasonable period (e.g., one year or less).

Since the active employees that are under age 59 1/2 need plan termination as an 'access event' so that they may have eligible rollover distributions and thus can rollover to IRAs, qualified plans, etc., an employer with a 403b plan funded through individual 403b7 custodial agreements needs the assurance that it has the legal authority to order the payouts incident to termination. Otherwise, those active employees under 59 1/2 and their custodial institutions that 'think' there is a valid termination in process and attempt a rollover would face premature taxation of the benefits for improper rollover contribution if even one individual 403b7 custodial agreement of a fellow employee remains in the 403b context a year later.

If there are back-end loads or other investment or account termination or transfer charges related to the individual 403b7 custodial agreement, the EE might to leave his retirement savings in the 403b7 context and not roll to an IRA. Some financial institutions will not do that in kind, or even if they will, will charge the EE's account, despite the assets remaining with them and otherwise in the same investments but now in the context of an IRA. One such 403b vendor is NEA Valuebuilders.

The IRS, including Architect, have yet to define which 403b contracts are "included" in an employer's 403b plan. This is particularly important to the ability to terminate, and knowing which individual 403b7 custodial contracts must be lined up in advance of attempting to terminate the 403b7 plan. One disconcerting comment made by Architect yesterday was that if an ER takes the minimalist approach and merely swaps name and contact info with a vendor that has any 403b contracts to which $ has been sent from 2004-2008, that vendor's 403b contracts to the EEs of the ER are "in the new, shiny plan". See Q&A 2 in Post #1 above. That suggests that such 403b contracts are part of the 403b plan's assets, further complicating the ability of the ER to terminate the 403b plan.

What is the difference between an individual custodial agreements and other custodial accounts under 403(b)(7). Is this some kind of Architectspeak?

Also there is definite no time frame for distribution other "then the distribution must occur soon as administrively practible after termination of the plan." That could be several years after termination.

I quite like the new term you coined, Architectspeak.

Some ERs (the more proactive ones) have 'group' 403b7 custodial agreements, somewhat similar to a group annuity contract. Under a group 403b7 custodial agreements, the ER typically has certain contractual rights that the ER may unilaterally exercise including to direct payout. If so, the ER has the legal right to effect payout incident to termination.

On the other hand, many ERs have taken a more conduit-only approach to the involvement of their payrolls in merely accommodating EEs that wanted to make pre-tax contributions to 403b7 custodial accounts. In such situation, the EE has to make his own separate arrangements with a custodial institution of his choosing, to set up a 403b custodial account. Typically, the only two contracting parties to such a custodial agreement are the EE and the custodial institution. There is mention of the ER, such as limiting contributions to remittances received by the custodial institution directly from the ER, but the ER has few if any contractual rights. As plan termination was not a concept known to the 403b world prior to the new regs, many such custodial agreements did not provide for payout incident to when the ER might 'terminate' its 403b plan.

The 403b statute has for years if not all along presumed that the 403b product would be purchased by the ER for the EE. So some of the individual 403b7 custodial agreements were drafted to reflect that the ER was the purchaser, and bestowed some contractual rights on the ER.



Here is where we end up in the quagmire of Architectspeak. You are correct that Treas Reg § 1.403(b)-10(a)(1) does not set out a time frame for the payout to be 'administratively practicable'. That reg merely provides that "[i]n order for a section 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan." Architectspeak at other forums during the last 12 months includes the notion that the 12-month period that applies for payout of benefits incident to the termination of a 401a QRP applies also to the payout period for terminating 403b plans.

In section 8.3 of the model 403b plan language attached to Rev Proc 2007-71, the model language provides (emphasis supplied):

In Architectspeak, this means that an ER with individual agreements in its 403b program may only terminate the 403b plan if all the individual agreements permit payout by reason of plan termination by the ER.

I think it is equally a plausible interpretation to be applied to the bolded phrase above in the model 403b plan language that contracts that permit payout incident to an ER terminating its 403b plan will be distributed and those contracts that do not will pay out on their own terms. Is the "subject to any restrictions contained in the Individual Agreements" a qualifier of the ER's practical ability to terminate the 403b plan (Architectspeak) or a qualifier on the operative portion of that sentence, "all accounts will be distributed" (not Architectspeak)?

FWIW, I did not include the bolded phrase in the 403b documents I drafted because of that vagueness.

Regarding bad terminations, Bob Architect focuses on the pitfalls of terminating a 403(b) plan with individual custodial accounts. What about plans involving individual annuity contracts? Does this mean that even though the employer has not authority with respect to an individual annuity contract (like an individual custodial account), the regulations permit a distribution of a "fully paid individual insurance annuity contract"?

Hi, Mr. Kite.

Treas Reg § 1.403(b)-10(a)(1) provides (bold added):

What about not fully-paid annuity contracts?

What steps must the ER take to 'deliver' a fully-paid annuity contract? Is notice from the ER to the annuity contract issuer and the EE that the ER is disclaiming any further power over the annuity contract and that the issuer may treat the EE as having all indicia and powers of ownership of the annuity contract enough? Does the ER have to have in hand and physically deliver the annuity contract to the EE?

And why are whatever mechanical steps are necessary to deliver (and thus 'distribute') a fully-paid annuity contract not sufficient to 'distribute' a 403b7 custodial account?

Bob A has suggested that a fully paid annuity contract would be similar to a "qualified plan distributed annuity" for qualified plan distributions, which is basically a transfer of an annuity whereby the recipient is not taxed on the value of the annuity upon receipt, but rather is taxed as payments are made under the annuity contract -- in other words, the transfer of the annuity is not a "distribution" for rollover or tax purposes, but the transfer would satisfy the distribution requirement for termination.

That's why I get confused when he talks about limitations on terminating a plan involving individual custodial accounts, but he occasionally indicates the limitations apply to "individual agreements" (defined in the model plan as including both custodial accounts and annuity contracts).

In other words, he clearly states that 403(b) plans with individual custodial accounts may NOT be terminated without employee consent because of the employer's lack of authority over the individual accounts, which implies that plans with individual annuity contracts do not have such a limitation, but there is no reason provided as to why there is a difference between these types of individual agreements. This implied distinction is especially confusing because the 403(b) statute itself treats custodial accounts as annuity contracts.

Even in the conduit type of arrangements where the employee signs the custodial agreement with the MF (which was mostly used in 90-24 transfers) the custodian can still terminate the agreement without the consent of the employee. The custodian will not want to continue administering a custodial account under the 403b plan after the plan has been terminated because the custodian will not be willing to assume any responsibilty for compliance with the provisions of 403b such as loan and hardship or amending the contract for future revisions to 403b. If the employer indicates its intent to terminate the plan the custodian will not question whether termination is permitted under the regs but will resign as cusotdian and distribute the funds to the participant to avoid any risk or responsibility for administering the account under the 403b regs.

If an ER gets written assurances from each of the custodians that it will do as you describe, then the ER might want to proceed to terminate the plan. Some of the custodians that responded to the reasonable, good faith effort my client/ERs made this past year under section 8.01 of Rev Proc 2007-71 ranged from (a) given its agreements, only if the EE consents would the custodian be willing to do a distribution incident to plan termination by the ER, (b) no response at all from the custodian, (c) affirmative refusals to cooperate with the ER's 403b plan efforts (even before any plan design or terms had been decided upon), (d) 'yes, we'll cooperate--here, sign our info service/service agreement and no, we won't even consider negotiating with or look at a counterproposed agreement of the ER', (e) custodian would distribute over top of any EE objection if ER terminates its 403b plan, (f) etc. Not really too manageable. Only one of my clients was able to successfully terminate its 403b program that included individual 403b7 custodial agreements from multiple vendors--and that was after the ER agreed to reimburse a few of the EEs that would face forced surrender charges.

I dont know who you were dealing with and some responses (e) make no sense. My understanding is that with the exception of Fidelity mutual fund cos are disengaging from participating in 403b plans. There may be some dumb custodians who do not have a termination clause in their agreements but I have never seen any custodial agreement (403b7 or IRA) that did not reserve the right to terminate the account to the custodian without getting the account holder's consent.

If assuming what you say is correct what types of 403b plan can be terminated under the 403b regs other than a group 403b7 arrangement where the employer controls the custodial agerement which is a very small percent of the 403b plans since 75% of 403b assets are held in annuity contracts. It is fair to say that less than 10% of all 403b plans would be eligible to terminate under the IRS regs when it understood that almost all plans that allow custodial accounts also offer annuity options.

(e) describes the situation where a custodian indicated in response to the ER that even if the EE objected to payout the custodian would nevertheless distribute from the 403b account if the ER notified the custodian that the ER was terminating the 403b plan--the situation you have described as the only response you have heard of.

There are mutual fund cos that will not take new dollars into their existing 403b accounts after 2008, but are simply shunning the invitation from ERs to have those 403b accounts maintained as part of the ER's 403b plan--opting instead to simply administer the existing contributed amounts in those 403b accounts, per the existing custodial accounts. Architectspeak of yesterday suggested that such 403b accounts might be "in" the ER's 403b plan anyway, just from the overture by the ER giving a name and contact info to the 403b custodian--that further complicates the ER's ability, logistically, to terminate its 403b plan.

I think that your estimate of less than 10% is likely accurate. It might be much less than 10%. I've heard one 403b practitioner that advises 403b ERs across the nation observe that only 3 such clients with individual 403b7 custodial accounts were able to successfully terminate in light of -10(a)(1). Others face plan-lock and a freeze is the best that they can do in avoiding the new compliance chores.

The new regs aim heightened compliance responsibility much more at the ER than at the custodian. Upping compliance would have been much more successful in my opinion had the regs outlined more obligations for the custodian, or risk the 403b contract becoming taxable.