SunGard Relius

The IRS has recently released Revenue Ruling 2009-18 which officially declares to be obsolete many old pre-2009 rulings and notices which dealt with 403(b) plans. The final 403(b) regulations, which generally became effective January 1, 2009, explained that the IRS was planning to make this move. Many of the old rulings are inconsistent with the new regulations. Moving to the new regulations means that many 403(b) plans must change their operations. Although the deadline to adopt a written 403(b) plan is December 31, 2009, 403(b) plans must already be operating in conformance with the regulations.

Among the old guidance the IRS obsoleted is Notice 89-23, which provided “safe harbor” guidance regarding coverage and nondiscrimination. The IRS issued this notice before issuing the current 410(b) and 401(a)(4) regulations. Today, 403(b) plans (other than church plans and plans of governmental organizations, such as public schools) must satisfy the same coverage and nondiscrimination tests with regard to employer contributions that qualified plans must pass.

Notice 89-23 also provided interim guidance relating to common control of tax-exempt organizations. This, too, is obsolete, replaced by the new Treas. Reg. §1.414(c)-5 (applicable to qualified and 403(b) plans). However, Revenue Ruling 2009-18 notes that a portion of Notice 89-23 still survives: the interim guidance regarding employer status for churches and public schools. The public school guidance is particularly noteworthy, because it affects application of the universal availability requirement (“if any employee of an employer can defer, all employees of the employer must be eligible to defer”).

The "employer" of the employees at a public school includes:

• the school itself,
• any other educational organization which has power to levy taxes to support the school or to have a significant role in setting or reviewing the school’s budget, and
• all other educational organizations which receive tax funds from the same levy process.

Effectively, this means that an individual school within a school district cannot set up a 403(b) plan permitting elective deferrals unless all schools in the district can defer. If a school receives the majority of its funds from one taxing authority, then all other schools receiving at least 80% of their funds from the same tax levy, whose budget is reviewed by the same educational organization, are part of the employer. For this purpose, the term “educational organization” includes any entity established by state law for educational purposes, which would otherwise satisfy the requirements of Code §501(c)(3).

Notice 89-23 gives the example of a two-year college and a university, each of which receives 80% or more of their tax disbursements from State S taxes and has its budget reviewed by the same educational organization (such as the State S Board of Regents). The Notice concludes that both schools are a single employer.

There are at least two provisions of the final regulations which particularly relate to 403(b) universal availability of deferrals for public school employers.

• The universal availability rule applies separately to government entities which are on different payrolls
• An employer that historically has treated one or more of its various geographically distinct (in different metropolitan areas) units as separate for employee benefit purposes may treat each unit as a separate organization if the unit is operated independently on a day-to-day basis. So, if a state university system has campuses in several cities, and historically each school has provided health and other employee benefits separately to its own employees, then the campuses can be separate employers under the universal availability rule, even though Notice 89-23 would otherwise indicate that the campuses are a single employer.

More and more qualified plan administrators find themselves being brought into the 403(b) marketplace. It is a rapidly changing marketplace, with a new set of regulations that just went into effect which make 403(b) plans more like 401(k) plans than they ever have been. But while there are many similarities between 403(b) plans and 401(k) plans, there are also several profound differences. Our 3-part web seminar beginning July 22, 403(b) Plans for 401(k) Practitioners, is designed for 401(k) practitioners with at least 3 years experience who would like to understand 403(b) plans. We will build on the knowledge you already have, so you can effectively advise clients and keep 403(b) plans running properly.