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Establishment of a 403(b) Plan


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Guest GeerTom

I prefer not to use the term "plan administrator" outside of ERISA plans, because of its implications that we should think of the role and responsibilities in ERISA qualified plan terms.

Neither 403(b) nor 457 requires a plan administrator, in the technical sense. Of course, somebody has to manage the plan, and conventionally people call that manager a plan administrator. There are good reasons to have someone fill that basic manager role, in terms of how the plan is written (i.e., allocations of authority and responsibilities) and managed. But there is no statutory requirement, and ERISA isn't going to require one.

Are there specific facts that make you concerned? Is there a specific issue that has come up?

Tom Geer

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Guest GeerTom

I am looking at it, and it appears to deal with whether or not an odd sort of credit union account constitutes an annuity or a custodial account invested in mutual funds. Am I missing some implication of the ruling?

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I am looking at it, and it appears to deal with whether or not an odd sort of credit union account constitutes an annuity or a custodial account invested in mutual funds. Am I missing some implication of the ruling?

The Ruling revokes Ruling 67-387 which authorized PERS 403(b) Plans.

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reg 1.403b-3(b)(3)(ii) provides that a plan may allocate responsibility for performing administrative functions including the functions to comply with the requirements of 403b and other tax requirements. Any such allocation must identify responsibility for compliance with the requirements of the IRC that apply on the basis of the aggregated contracts issued to a participant under the plan. A plan is permitted to assign such responsbilities to someone other than the employer but not to participants (other than employees of the employer a substantial portion of whose duties include administration of the plan). Plan may incorporate by reference other documents which become part of the plan.

Thats all there is on who can be a plan administrator. A 403b administrator is anyone who agrees to perform some or all of the duties of the administrator other than the plan participants themselves. There is no reason to go back to IRS rulings that have been revoked.

mjb

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Guest GeerTom

I read Rev. Rul. 67-387 as saying that the STRS actually was the issuer of the rights determined to be an annuity, not simply or even at all the administrator of a plan-the arrangement looks a lot more like a governmental plan permissive service credit purchase or some reverse DROP transfer than anything else we see today. ERISA then added clarity and reduced the pressure to approve of these oddities by saying that you could have custodial accounts invested in mutual funds, not just annuities issued by insurance companies. Rev. Rul. 82-102 then said simply that a credit union is not an insurer and the account in question was not invested in mutual funds. The revocation of Rev. Rul. 67-387 was the result of the core of 82-102, which was to get rid of these odd investment arrangements in light of the availability of custodial accounts invested in mutual funds.

I do not read Rev. Rul. 67-387 as saying anything at all about administration, as opposed to funding. And I read Rev. Rul. 82-102 as saying only that only insurance company-issued annuities and custodial accounts invested in mutual funds will be permitted under 403(b). Neither has anything directly to say about administration.

I would not be worried about this very much. However, given the tendency of any organization to expand its scope, I would ask the PERS what they will be doing, specifically, and make sure they are (1) actually doing what needs to get done, and (2) just administering not funding.

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Here's what 403(b) Answer Book says:

Q 6:30 How may a state retirement system fund be a Section 403(b) investment?

An investment under a state teachers' retirement system generally is not a permitted Section 403(b) investment. Likewise, an investment under a separately funded employee retirement reserve governed by the state insurance department's supervision generally is not a permitted Section 403(b) investment. [Rev. Rul. 82-102, 1982-1 C.B. 62, revoking Rev. Rul. 67-387, 1967-2 C.B. 153; Rev. Rul. 67-361, 1967-2 C.B. 153]

But a contract under a plan that was established on or before May 17, 1982 in good-faith reliance on either of the revoked rulings may continue to cover those participants covered on May 17, 1982 if the plan and the investment meet all conditions required by current Treasury regulations. If either transition rule applies, the contract may continue to cover those participants covered on May 17, 1982, including “an employee who becomes covered for the first time under the plan after May 17, 1982.” [Treas. Reg. § 1.403(b)-8©(3)]

As Tom Geer notes, a question about what investment is or isn't permitted is separate from a question about which person may administer a 403(b) plan.

As Matt Bozek observes, section 1.403b-3(b)(3)(ii) is mostly about restraining a plan's documents from allocating to each participant alone responsibility to administer the plan.

Any non-natural person that considers whether to accept an appointment to serve as a plan's administrator should get its lawyer's advice about how non-tax law might affect the service.

To return to what I suspect was joel's original inquiry, the Internal Revenue Code does not preclude a State government agency from arranging a 403(b) plan for those State and local government employees who are public-schools employees (if the arrangement is proper under State law). If the transition rule described above does not apply, the arranger would limit the investments to annuity contracts and custodial accounts that hold regulated investment company shares.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Apparently I should have used the word "establish" rather than "administer" to begin with.

My question remains: Under Rev Ruling 82-102 a public employee retirement system (PERS) may no longer establish a 403(b) Plan.

Q.: Is a public sector Deferred Compensation Plan considered a PERS under RR 82-102?

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I think the question took a detour when the old IRS rev rulings were introduced which caused a digresson of their historical relevance which is nada. While posters agree that any party other than a plan participant can be the administrator of a 403b plan the OPs question was could a 457 plan be the administrator which is a rather vague term. Reg 1.457-2(k) defines a plan as any agreement between an eligible employer and participants under which payment is deferred. A gov. 457b plan operates through various entities such as the custodian or trustee, mutual funds, insurance co, TPAs, etc who would have to agree to be the administrator of the 403b plan.

mjb

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I think the question took a detour when the old IRS rev rulings were introduced which caused a digresson of their historical relevance which is nada. While posters agree that any party other than a plan participant can be the administrator of a 403b plan the OPs question was could a 457 plan be the administrator which is a rather vague term. Reg 1.457-2(k) defines a plan as any agreement between an eligible employer and participants under which payment is deferred. A gov. 457b plan operates through various entities such as the custodian or trustee, mutual funds, insurance co, TPAs, etc who would have to agree to be the administrator of the 403b plan.

Why do you revert back to my original question when I told you that I should have used the word "establish" rather than "administer" in my original question?

Moreover, my topic reads: "Establishment of a 403(b) Plan".

My question remains: Under Rev Ruling 82-102 a public employee retirement system (PERS) may no longer establish a 403(b) Plan.

Q.: Is a public sector Deferred Compensation Plan considered a PERS under RR 82-102?

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Joel:

Unfortunately I was doing something else and did not post my response before your email arrived.

You need to ask the IRS as to whether a public sector deferred compensation plan is considered a PERS under RR 82-102 since the IRS administers the tax law.

mjb

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"To return to what I suspect was joel's original inquiry, the Internal Revenue Code does not preclude a State government agency from arranging a 403(b) plan for those State and local government employees who are public-schools employees (if the arrangement is proper under State law). If the transition rule described above does not apply, the arranger would limit the investments to annuity contracts and custodial accounts that hold regulated investment company shares."

Peter,

Yes, this has always been the case, pre and post RR 82-102.

But prior to RR 82-102 a school district could also use a PERS as the funding vehicle for annuities under 403(b)1.

In the instant case the school district wants to terminate the 403(b) plan and transition its assets into a new 403(b) plan established by the school district's Deferred Compensation Plan. Would this be permitted?

Thanks,

Joel

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"To return to what I suspect was joel's original inquiry, the Internal Revenue Code does not preclude a State government agency from arranging a 403(b) plan for those State and local government employees who are public-schools employees (if the arrangement is proper under State law). If the transition rule described above does not apply, the arranger would limit the investments to annuity contracts and custodial accounts that hold regulated investment company shares.

Peter,

Yes, this has always been the case, pre and post RR 82-102.

But prior to RR 82-102 a school district could also use a PERS as the funding vehicle for annuities under 403(b)1.

In the instant case the school district wants to terminate the 403(b) plan and transition its assets into a new 403(b) plan established by the school district's Deferred Compensation Plan. Would this be permitted?

Thanks,

Joel

Joel:

Termination of the 403b plan will create new issues. reg.1.403b-10(a)(1) in certain cases prohibits employer from establishig a 403b plan for 12 months after distribution of all assets from the terminated 403b plan. I dont know what you mean by transition assets to a new 403b plan. 403b plan termination requires benefits to be distributed upon termination either in a lump sum or annuity. Employer cannot transfer assets to new plan.

Finally counsel to the school district would need to review whether DC plan has the authority to establish a 403b plan under local and state law.

mjb

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I have received an important clarification.

The School District wants to retain the 403(b). It wants to terminate the services of the investment provider, plan administrator and recordkeeper and have these functions performed by the School District's 457(b) Plan. The 457(b) plan's investment line up consists of a series of Separate Accounts.

Do Separate Accounts satisfy the requirement of using Custodial Accounts, for investment in mutual funds, under section 403(b)7?

Thanks,

Joel

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What do you mean by a separate account? 403b planscan only be funded by mutual funds or annuities. Are the separate accounts variable annuities?

Are you saying that the SD wants to use the separate account in the 457 plan to fund the 403b plan? If so who will maintain the account currently in the 403b plan?

Will the 403b accounnts be frorzen without allowing for any new contributions?

Who is the investment provider? an insurance Co, brokerage, etc?

are record keeper and plan administraor related to provider?

This seems like a rather complicated exercise which will benefit few employees. If the SD employees are satisfied with the 457b plan then they can contribute 17/22.5k to that plan. Very few SD employees will be able to contribute twice that amounte to both plans.

mjb

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What do you mean by a separate account? 403b planscan only be funded by mutual funds or annuities. Are the separate accounts variable annuities?

Are you saying that the SD wants to use the separate account in the 457 plan to fund the 403b plan? If so who will maintain the account currently in the 403b plan?

Will the 403b accounnts be frorzen without allowing for any new contributions?

Who is the investment provider? an insurance Co, brokerage, etc?

are record keeper and plan administraor related to provider?

This seems like a rather complicated exercise which will benefit few employees. If the SD employees are satisfied with the 457b plan then they can contribute 17/22.5k to that plan. Very few SD employees will be able to contribute twice that amounte to both plans.

"Separate Accounts are similar to mutual funds in that a money manager develops a model portfolio specializing in a particular aspect of the market (such as large-cap, growth, small-cap or value) and purchases or sells securities in an effort to generate positive returns. The key difference between mutual funds and separate accounts is that, in a separate account, the money manager is purchasing the securities in the portfolio on behalf of the investor, not on behalf of the fund."

A Separate Account is not a variable annuity.

The "investor" in the definition is the Board of Trustees of the Deferred Compensation Plan. A very popular example of the use of Separate Accounts is the Federal Thrift Savings Plan. The Plan participant directs his/her contributions to one or more of the several Separate Accounts on the Plan's investment line-up.

Q.: Will these Separate Accounts satisfy the requirement of section 403(b)7? The objective is to give each 403(b) participant, active and retired, the same investment line-up available under the 457(b) Plan; i.e., Separate Accounts. The current 403(b) accounts will be frozen without allowing for any future contributions. With the appropriate employer involvement the frozen balance balance may be transferred to one or more Separate Accounts.

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Joel:

You answered your own question. If the separate accounts are not Variable Annuities or mutual funds that are regulated investment companies under IRC 851(a) they can not be used to fund a 403b plan.

Not so fast. Just like Revenue Ruling 67-387 permitted an annuity issued by a Public Employee Retirement System to substitute for a commercial annuity under section 403(b)1 why is it unreasonable to argue that Separate Accounts should be allowed to substitute for mutual funds under section 403(b)7?

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Joel:

You answered your own question. If the separate accounts are not Variable Annuities or mutual funds that are regulated investment companies under IRC 851(a) they can not be used to fund a 403b plan.

Not so fast. Just like Revenue Ruling 67-387 permitted an annuity issued by a Public Employee Retirement System to substitute for a commercial annuity under section 403(b)1 why is it unreasonable to argue that Separate Accounts should be allowed to substitute for mutual funds under section 403(b)7?

Because by adding IRC 403(b)(7) to the IRC in ERISA in 1974 Congress made it clear that only annuity contracts and mutual funds that are regulated investment companies under IRC 851(a) are permitted investment vehicles for 403b contributions. That conclusion was the basis for the Rev Rul 82-102 determintion that prohibited establishment of 403b annuity plans that were funded by non annuity type providers such as trusts and CDs. The existing 403b PERS type funds such as the NYC teachers trust and NJ collective annuity trust were allowed to continue in existance.

mjb

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Joel:

You answered your own question. If the separate accounts are not Variable Annuities or mutual funds that are regulated investment companies under IRC 851(a) they can not be used to fund a 403b plan.

Not so fast. Just like Revenue Ruling 67-387 permitted an annuity issued by a Public Employee Retirement System to substitute for a commercial annuity under section 403(b)1 why is it unreasonable to argue that Separate Accounts should be allowed to substitute for mutual funds under section 403(b)7?

Because by adding IRC 403(b)(7) to the IRC in ERISA in 1974 Congress made it clear that only annuity contracts and mutual funds that are regulated investment companies under IRC 851(a) are permitted investment vehicles for 403b contributions. That conclusion was the basis for the Rev Rul 82-102 determintion that prohibited establishment of 403b annuity plans that were funded by non annuity type providers such as trusts and CDs. The existing 403b PERS type funds such as the NYC teachers trust and NJ collective annuity trust were allowed to continue in existance.

I think the investment management landscape was a little different in 1967. And even as late as 1982 I don't believe Separate Accounts were in use by Defined Contribution plans.

Having said that, if Separate Accounts are commonly used by Defined Contribution plans like the Federal Thrift Savings Plan (under section 401(a), The New York City Deferred Compensation 457(b) and 401(k) Plan, under sections 457(b) and 401(k) and the Florida Retirement System's Investment Plan, under section 401(a) it may be time for the IRS to rule that the use of Separate Accounts is a suitable replacement for the mutual fund under section 403(b)7.

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Joel:

You are comparing apples to oranges in what investments can be provided in a 403b plan vs. qual/457 plans.

Under the IRC qual plans such as 401k plans and 457 gov. plan assets are held in a trust which can invest in annuities, mutual funds, separate accounts, ETFs, collective trusts, stocks, bonds, etc. The Thrift Savings plan is considered to be a 401k plan. 403b plan assets are generally not held in a trust and under 403b the only permitted investments are annuities and mutual funds. Rev. Rul 82-102 held that 403b as amended by ERISA limited investments in a 403b annuity to annuities and mutual funds and other investments such as CDs were not considered to be annuities even if paid periodically. The Rev rule grandfathered 403b plans established as trusts by PERS that the IRS had previously approved as 403b plans. Corbin v. US, 760 F2d 234, upheld RR 82-102 limiting 403b investments to mutual funds and annuities. http://law.justia.com/cases/federal/appell.../760/234/76086/. After Corbin was decided 403b was amended to permit church 403b retirement income accounts defined in IRC 403(b)(9) which can be held in a trust. See reg. 1.403(b)-9(a)(7). Use of any new type of investment such as a separate account to fund a 403b plan established by a non profit or public school would require an amendment to 403(b).

You havent answered the question of why there is a need for the SD to establish a 403b plan with separate accounts if SD employees can invest in a 457 plan that invests in separate accounts. Employees can invest up to $22,500 in the 457 plan.

mjb

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Joel:

You are comparing apples to oranges in what investments can be provided in a 403b plan vs. qual/457 plans.

Under the IRC qual plans such as 401k plans and 457 gov. plan assets are held in a trust which can invest in annuities, mutual funds, separate accounts, ETFs, collective trusts, stocks, bonds, etc. The Thrift Savings plan is considered to be a 401k plan. 403b plan assets are generally not held in a trust and under 403b the only permitted investments are annuities and mutual funds. Rev. Rul 82-102 held that 403b as amended by ERISA limited investments in a 403b annuity to annuities and mutual funds and other investments such as CDs were not considered to be annuities even if paid periodically. The Rev rule grandfathered 403b plans established as trusts by PERS that the IRS had previously approved as 403b plans. Corbin v. US, 760 F2d 234, upheld RR 82-102 limiting 403b investments to mutual funds and annuities. http://law.justia.com/cases/federal/appell.../760/234/76086/. After Corbin was decided 403b was amended to permit church 403b retirement income accounts defined in IRC 403(b)(9) which can be held in a trust. See reg. 1.403(b)-9(a)(7). Use of any new type of investment such as a separate account to fund a 403b plan established by a non profit or public school would require an amendment to 403(b).

You havent answered the question of why there is a need for the SD to establish a 403b plan with separate accounts if SD employees can invest in a 457 plan that invests in separate accounts. Employees can invest up to $22,500 in the 457 plan.

Matt:

Thank you for your continued interest. There is no overriding need for the SD to use Separate Accounts for its 403(b) plan. It simply does not want to use the current set of investment provider/TPA/recordkeeper, nor does it want to terminate the 403(b) plan lest the participants become prey to commission-based products in IRA rollover transactions and/or cash-in their Eligible Rollover Distributions.

The SD believes that the DCP is well positioned to assume all of these functions at a lower cost. Apparently this would be a seamless transition if not for the fact that the DCP does not offer mutual funds investing but Separate Accounts instead.

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