Guest Article

(From the September 8, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

REMINDER: January 1, 2009 Deadline for Compliance with New 403(b) Regulations

Sponsors of 403(b) plans -- subject to some notable exceptions -- must be in compliance with the final Treasury regulations by January 1, 2009. Key among the new requirements is that the plan must be in writing. It must contain all the material terms and conditions for eligibility, benefits, applicable limitations, the contracts available under the plan, and the time and form under which benefit distributions will be made.

New Regulations Updated Those Issued in 1964

Final regulations concerning IRC § 403(b) tax-sheltered annuity contracts were issued in July 2006, and served to update existing regulations that had been finalized back in 1964. The new regulations incorporate the various statutory changes and rulings that occurred during that 40-year period, and reflect the increasing similarities between IRC § 403(b) arrangements and qualified plans.

The regulations generally are effective for tax years beginning after December 31, 2008. Since almost all individuals are on a calendar taxable year, this means that the regulations will typically apply on January 1, 2009. However, there are some notable exceptions, including the following:

Various New Provisions

As noted above, a major new requirement is that the plan be in writing. Also new is the requirement that deferrals be made under a cash-or-deferred election (i.e., only matching contributions can be conditioned on the deferral), which effectively prohibits the grant of additional benefit accruals under the employer's defined benefit plan on account of a participant making deferrals under the IRC § 403(b) plan. Further, the "reasonable good faith standard" under Notice 89-23 for complying with the nondiscrimination requirements is revoked, requiring employer nonelective and matching contributions to satisfy the nondiscrimination requirements under IRC §§ 401(a)(4), 401(a)(5), 401(a)(17), 401(m) and 410(b) in the same manner as qualified plans.

Reportedly, IRS is developing a determination letter and/or pre-approved plan program for 403(b) arrangements to be effective in 2009. Also, IRS has dedicated several of its web pages to providing information on the new 403(b) requirements.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.