As practitioners amend 401(k) plans for the final 401(k) and 401(m) regulations and for Roth (if added to the plan), 403(b) plan practitioners have inquired whether 403(b) plans must make similar amendments, and if so, what the deadline is for such amendments. With the exception of the changes to hardship rules and the safe harbor requirements, the 401(k) regulations do not affect 403(b) plans. However, the 401(m) regulations affect 403(b) plans with matching contribution formulas. To determine whether a 403(b) plan must be amended, the practitioner first must understand the written plan requirement for 403(b) plans.

Written Plan Requirement. When Congress first enacted Code §403(b), it simply was an arrangement that permitted employees to contribute money on a tax-deferred basis to an annuity (later expanded to include mutual funds). Over the past forty years, the 403(b) arrangement has evolved into a retirement plan similar to a qualified plan. In response, Congress has imposed many of the qualified plan requirements on 403(b) plans. However, neither Congress nor the IRS has ever imposed a written plan requirement on 403(b) plans. Nevertheless, many employers have adopted a written plan to facilitate plan compliance and administration. However, since the Code does not impose a written plan requirement, the IRS does not review nor does it challenge a participant’s tax benefits because of the content (or lack of) of a 403(b) plan document. Of course, a 403(b) plan operationally should comply with any regulatory or statutory changes.

403(b) Regulations. In response to concerns regarding compliance with 403(b) requirements, the IRS, for the first time, has included in its new regulations a written plan requirement. The regulations are still proposed and will not be effective until after the IRS finalizes the regulations. In a recent discussion with an IRS official from the National Office, we were informed the IRS hopes to release final regulations some time during the first six months of 2007, with an effective date no earlier than January 1, 2008. The IRS also will provide guidance as to the content requirements of a 403(b) plan (probably through model language) and it will provide a deadline to comply with the new written plan requirement. Based on this, under IRS requirements, an employer will not need to have a 403(b) document or update its existing document until sometime in 2008 at the earliest.

ERISA. A 403(b) plan that includes employer contributions (e.g., matching contributions) and that is not sponsored by a government or a church is subject to Title I of ERISA. ERISA §402 requires employee benefit plans (subject to ERISA) to be in writing. However, the DOL has never specified the content of a 403(b) document nor challenged a 403(b) plan on its content. In fact, DOL officials have indicated that the custodial agreement or the annuity contract is sufficient to satisfy the ERISA written plan requirement.

Although a 403(b) plan sponsor currently may elect to amend its plan document for the Code and associated regulatory changes, neither the IRS nor the DOL has requested such amendments nor has either yet imposed any amendment deadline. A practitioner making such amendments should advise its client that it will need to make additional amendments after the IRS finalizes the regulations. A more efficient approach would be for the practitioner to wait for the IRS to finalize the regulations and then to incorporate not only recent statutory and regulatory changes but also the changes that the IRS will require in the final 403(b) regulations. Waiting for the final regulations also will permit the practitioner to determine what other provisions the IRS expects a 403(b) plan to include.

SunGard has developed a prototype-style 403(b) document (i.e., adoption agreements and basic plan document) to facilitate compliance with the forthcoming written plan requirement. The 403(b) document will accommodate elective deferrals, matching and nonelective contributions. The document also will accommodate both ERISA and non-ERISA 403(b) plans. For more information or to purchase this plan, please call 800-326-7235, Ext. 1100.