Section 403(b) tax-sheltered annuity plans became subject to an updated and revised set of regulations effective Jan. 1, 2009. One of the requirements of the new regulations is that the plan sponsor must maintain a written plan document that satisfies the regulations’ various rules and conditions
Transition Rule for Written Plan Requirement
Out of concern that many plan sponsors would not have in place written plan documents by Jan. 1, 2009, that contained all necessary requirements, the IRS announced a special transition rule at the end of 2008. Under the transition rule, a Section 403(b) plan will meet the written plan requirement so long as:
- By no later than Dec. 31, 2009, the plan sponsor adopts a written plan document intended to satisfy the requirements of Section 403(b) (including the new regulations) and which is effective as of Jan. 1, 2009.
- During 2009, the sponsor operates the plan in accordance with a reasonable interpretation of Section 403(b), taking into account the new regulations.
- Before the end of 2009, the sponsor uses its best efforts to retroactively correct any failure to comply with the new requirements during 2009.
What to Do Now
Since this transition rule will expire shortly, Section 403(b) plan sponsors should in the next few months review their Section 403(b) plans and the manner in which those plans are operated. Some plan sponsors will use a plan document that has been individually designed for their respective situations. Others, however, may intend to adopt (or have adopted) a standardized document produced by a third-party vendor. Regardless of the type of plan document a plan sponsor may use, the sponsor should confirm that:
- It has adopted a written document for its Section 403(b) plan.
- The plan document contains all provisions required under the Section 403(b) regulations to be included in a plan.
- The plan’s terms properly reflect the manner in which the plan is operated.
- The manner in which the plan is operated complies with the requirements of the Section 403(b) regulations, other applicable tax rules, and the Employee Retirement Income Security Act of 1974, as amended (ERISA) (to the extent the plan is subject to ERISA).
Failure to take these steps could cause the plan to fail to qualify for tax deferral, thus exposing participants to current taxation of their plan benefits.
For Further Information
We have circulated a number of articles on Section 403(b) plans since the final regulations were issued. These articles address the following topics: general overview of the new regulations; discussion of steps necessary to comply with certain requirements; written plan document transition rule; and transition relief for plan reporting requirements.
McGuireWoods has extensive experience advising plan sponsors as to the requirements of the final regulations. Please contact any member of our employee benefits team, if you have questions concerning the matters discussed in this article, or need any assistance in reviewing your plan.