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I know we have a few 403(b) experts who participate in this message board, so if one or more of you are interested in the issue described here and have any insight into this issue I would appreciate your thoughts.

The IRS, first in the proposed regs. and now in the final regs., slipped in a requirement under the Universal Availability rule that does not seem to have any basis in the statute or the legislative history (at least which I could find). Namely, under the "effective opportunity" component of the rule, the regs. say that it is not permissible to make any other rights or benefits (other than matching contributions and a couple of other exceptions) conditioned upon a participant making or failing to make contributions to the 403(b). This is basically the same as the rule under 401k which is in the law.

Do you know how the IRS justifies the promulgation of this requirement (other than that people at IRS think it's a good idea)? Are they saying it is a reasonable interpretation of the statute and that's it? I can understand how it might be a reasonable interpretation to say that you can't have universal availability if you punish people who make 403b) contributions, but I don't understand why it is a reasonable interpretation to say that you can't have universal availability if you REWARD people who make 403(b) contributions. The IRS created exceptions for matching contributions to a dc plan and a couple of other features, but it appears that no other types of REWARDS are permitted (e.g., providing an extra vacation day, or a cash bonus, or a gold watch, or a reduction in health insurance premiums). Have any IRS or Treasury people hinted that they might be taking another look at this rule?

I've actually read that IRS people have said that they wanted to put 403bs on par with 401ks in that regard, but unfortunately (or fortunately) the IRS does not have the same authority as Congress and the President, so that type of statement doesn't answer my question

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You're not alone in thinking that the 403(b) anti-conditioning rule might be one that a court might decline to apply.

If an employer wants to provide something that would violate that rule (and is prepared to take on a fight in defending its position after examination), it should consider buying the protection of a lawyer's written opinion that, more likely than not, a court should find that the rule is not a proper interpretation of the statute.

Until there's a paying client who wants advice about the rule, it's too time-consuming to get into the arguments that support or attack why the rule is or isn't a proper interpretation.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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There are many provisions in the 403b regs that have no statutory basis or were not mentioned in the legislative history such as allowing a rollover of 403b funds upon termination of the plan or aggregating employers under the CG rules who have interlocking boards which is not mentioned in IRC 414(b)and ©. That doesn't mean the the IRS exceeded its authority in making such a determination as permitted under IRC 7805. I dont think you will be able to obtain a favorable opionion of counsel that will protect the employer under the C230 standards if additional rewards not permitted in the regs are offered.

You could always ask Bob Architect.

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fgc and mjb: I am able to assess the strenghts and weaknesses of the position taken in the regs. all by myself thank you. What I am looking for is some information - if you have it - of what the IRS has said to defend itself in response to the criticism, or whether IRS has stated/hinted that it is going to take another look at the rule.

By the way, as to the aggregation of non-stock entities, the IRS has plenty of authority per 414©. As to rollovers, you may be correct, but who would ever be disadvantaged by that position?

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The preamble to the final rule [attached] says nothing about the 403(b) anti-conditioning rule. One imagines that the Treasury department would defend that particular rule as an interpretation of the word "elect" as it appears in the context of IRC 403(b)(12)(A)(ii). A counter-argument is that IRC 401(k)(4) expressly states its anti-conditioning rule, and the absence of a similar text in IRC 403(b) means that Congress didn't provide that rule as a condition of 403(b) treatment.

07_3649.pdf

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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  • 3 months later...
Guest Grant
The preamble to the final rule [attached] says nothing about the 403(b) anti-conditioning rule. One imagines that the Treasury department would defend that particular rule as an interpretation of the word "elect" as it appears in the context of IRC 403(b)(12)(A)(ii). A counter-argument is that IRC 401(k)(4) expressly states its anti-conditioning rule, and the absence of a similar text in IRC 403(b) means that Congress didn't provide that rule as a condition of 403(b) treatment.

I am aware of several programs where a match on the 403(b) deferral is made to a cash balance plan. (or rather, a cash balance credit is based on the 403(b) deferral, e.g., 50% on the first 4%, max. of 2%).

Does this regulation mean that we cannot do this anymore? would a union plan be excluded?

Thanks!

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Grant, that is exactly the situation my client faces (although I did not describe it in my original post). It seems to be squarely trapped by the rule in the regs, and the benefits consultants and actuaries at a major international accounting firm are advising their clients who have this structure that they'll have to get rid of it by 1/1/09. I've been trying to find out from the IRS if they might bend on this type of structure and issue a favorable letter ruling that it's ok under the new regs, but so far no luck. Not sure why a union plan would be excluded, although perhaps it would get a one-year delay.

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Guest Grant
Grant, that is exactly the situation my client faces (although I did not describe it in my original post). It seems to be squarely trapped by the rule in the regs, and the benefits consultants and actuaries at a major international accounting firm are advising their clients who have this structure that they'll have to get rid of it by 1/1/09. I've been trying to find out from the IRS if they might bend on this type of structure and issue a favorable letter ruling that it's ok under the new regs, but so far no luck. Not sure why a union plan would be excluded, although perhaps it would get a one-year delay.

I called John T, the guy listed as author of the regs, but he said to call Bob Architect. I called him, but no response yet.

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I'm yet waiting for a response to a question I posed Bob A in January and renewed in May! Hope you have better success.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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The preamble to the final rule [attached] says nothing about the 403(b) anti-conditioning rule. One imagines that the Treasury department would defend that particular rule as an interpretation of the word "elect" as it appears in the context of IRC 403(b)(12)(A)(ii). A counter-argument is that IRC 401(k)(4) expressly states its anti-conditioning rule, and the absence of a similar text in IRC 403(b) means that Congress didn't provide that rule as a condition of 403(b) treatment.

I am aware of several programs where a match on the 403(b) deferral is made to a cash balance plan. (or rather, a cash balance credit is based on the 403(b) deferral, e.g., 50% on the first 4%, max. of 2%).

Does this regulation mean that we cannot do this anymore? would a union plan be excluded?

Thanks!

The preamble to the proposed 403b regs, 11/16/04 p 67075, states that 'the proposed regulations include an anti conditioning rule comparable to the anti conditioning at 401(k)(4)" as well as rules similar to the rules under 401(a)(30) and provisions to pay out excess contributions under 402(g).

"As a result, under the proposed regulations, the three major differences between the rules that apply to 403b plans and the rules applicable to elective deferrals under 401(k) are: the limitation of 403b plans to NPs and public schools, limitation on investments to mutual funds, annuites and retirement income accounts and the universal availability rule."

The overview of the preamble contains this statement:

"A major effect of the legal changes in section 403b has been to diminish the effect to which the rules governing 403b plans differ from the rules governing other arrangements that include salary reduction contributions, i.e., 401k and 457 plans. Thus these regulations will reflect the increasing similarity among these arrangements."

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