Ellie Lowder

Troy, it varies (generally by state). I have seen situations where providers simply refused to pay fees if they were relatively substantial to protect the integrity of the pricing of the products offered - and, the employer was then forced to either abandon use of the TPA, or ask employees to pay the costs. California Code does not permit employers to charge administrative costs to the participants - hence, I am not sure how this one will play out, since this is a fairly new development in your State. I have received some calls from providers about that issue - however, have not yet heard of any that have flatly refused and withdrawn from that employer. It has been reported to me that, in the Hawaii situation, most providers agreed to pay the fees but I have not independently verified that.

In fact, there is rarely a common trustee in a 403(b) plan, and many plans are funded with individual contracts. I am told that the SAR requirement is rarely met in an ERISA 403(b) plans, and that explanation to the DOL that plan assets are directly owned by the participant who receives statements directly from the product/investment providers has been acceptable.

Yes, Chuck, I agree. I field hundreds (actually several thousand) calls a year about all aspects of 403(b), 457(b) and related plans - and the 15 year of service limit seems to be increasing in frequency. The IRS tells me that this is the real post-EGTRRA "culprit" in causing excess deferrals because the rules determining eligibility are not clearly understood by all. Clearly, too, many don't realize that only specific employers are eligible for it - e.g., education, hospitals, home health services agencies, health & welfare agencies and religious organizations. Certain 501©(3) employers don't fit any of these categories - thus, it is not available.

Incidentally, school districts in other states (albeit, still pretty limited) are beginning to pass TPA charges along to providers - e.g., the State of Hawaii as one example. Some providers will pay; others might not. However, the costs will unfortunately ultimately probably be passed through to the participants depending on the extent of the charges. I have receive a number of calls from various providers about this.

The 403(b) & 457(b) Primer Plus might be of help to you - while it is devoted to both ERISA and Non-ERISA 403(b) plans plus 457(b) plans, one of the 11 chapters does deal with nondiscrimination rules. Kristi Cook and I co-authored the book. You can view the contents to see if it is of interest in the Benefits Link bookstore.

Since 403(B) does not have its own hardship withdrawal rules, the 401(k) hardship rules are considered to apply (right now the IRS is writing 403(B) regulation so we'll have our very own someday) - thus, many are assuming that the safe harbor rule change to 6 months of suspension of deferrals also applies to 403(B)- that is how the bulk of the industry is treating the change.

While your question infers it, you didn't actually say that these are non-elective contributions, e.g., employer contributions, not elective deferrals. Of course, you cannot use a vesting schedule for elective deferrals. Just being precise!

Since there is no requirement that there be a plan document, you will find that very few public school employers have a plan document. The exemption from ERISA, and the fact that Code does not require a written document will generally mean there isn't one. The custodial accounts and the annuity contracts are required to contain specific language, and the employer should always ascertain that the options being offered to employees do conform to those requirements. In the case of employer contributions (which are of growing interest post-EGTRRA in public schools), employers generally draft an administrative policy describing the nature of the employer contributions, rather than use a plan document. The IRS comments (in the Examination Guidelines, I, A,(6) "Unlike qualified plans, 403(B) plans are not subject to the requirements of a definite written program (although Title I requires a written plan document for certain 403(B) plans). Accordingly, there is no Title II requirement that a 403(B) plan oeprate in accordance with its terms. However, certain Code requirements must be reflected in the underlying annuity contracts or custodial account agreements."

Governmental groups (includes public education) cannot establish new 401(k)plans. Some do have old grandfathered plans (established before May of 1986). Public Education employers can establish 403(B), 457(B), 401(a)plans. Most do sponsor 403(B) plans - many also sponsor 457(B) plans, either locally if permitted by state statue - or through the state deferred comp plan.

And, in response to "when will the regs. be finalized", the IRS says by mid-2003. And, by year-end, the plan is to issue 457 examination guidelines to facilitate the audits of 457 plans. The IRS Field people have reported already been trained for those audits. Harvey, I really concur that the years of eligibility count from the time participants could participate in the state plan through the employer and continue to be counted when the employer installs their own "local" plan. However, the IRS has been known to blind side us in the past.

To complete the response to the original question, you would tax-free transfer a portion of the account, leaving some balance there for future elective deferrals - e.g., would not transfer the entire balance.

Chuck, the Exam. Guidelines do say that examination steps for this increased limit should take into consideration CODAs, 403(B), and 457 plan contributions made in prior years. Remember that those exam guidelines have not recently been updated; however, my guess is that contributions to the 457(B) plan of the same employer would count against the $5k average even though those 457 contributions are not literally "elective deferrals" under 402(g). Providers with which I work do count past 457 contributions for years before 2001 (e.g., the coordinated limit; however, there appears to be uncertainty for years after. My conservative guess is that it is best to continue to count them - I'll ask Bob for his informal view when I next talk to him - or,at our NTSAA conference, yes?

Actually, I am aware that some insurers are attempting to set up systems to provide for separate sub accounts in 403(B) plans - this will help them attract tax-free transfer business of inherited accounts from insurers that don't do it, as I understand the reasoning! Also, movement of money while the participant is still alive - e.g., to pre-plan for non-spouse beneficiary stretch opportunities.

Nope - wish I could. My info comes from informal discussions with the IRS (frequent, I might add), and I wish we had regulation. Unfortunately, I am told that the IRS has begun writing regulations (the first, they say, in 38 years), but that it may be years before we see them. They point out that it took five years to write the proposed regulations for 457 plans (issued this year, finally). It is now clear, post EGTRRA, that non-salary reduction contributions can be made post-employment (for up to 5 tax years following the year of severance); however, elective deferrals, according to their informal remarks, are not permitted, except in the limited circumstances previously mentioned. Have any of you seen anything to which we could point - e.g., PLRs? I haven't!

The IRS (in informal discussions) takes the position that elective deferrals CAN BE MADE if severance pay is paid as soon as administratively possible following the retirement date. They have commented to me that "a matter of weeks" might be ok to give the employer time for final calculations and issuance of the severance check but that "a matter of months probably is not ok". Thus, in your situation, elective deferrals would be permitted from that final check issued very soon after retirement! I just recently reopened this issue w/key staffer at the IRS - and, the above continues to be their current position! Other than that, of course, elective deferrals (as correctly pointed out in this thread) are not permitted post-employment.

It also depends on the type of employer sponsoring the 403(B) plan - if a gov't employer, no Title I, ERISA coverage applies - if a church or qualified church controlled organization, no ERISA coverage UNLESS an affirmative election is made to be covered under ERISA. In the case of a gov't employer or church/QCCO, therefore, no 5500s are required regardless of whether non-salary reduction contributions are being made.

If you are an NTSAA member, you are welcome to call me w/questions! Have at it!

Public School Districts are routinely setting up post-employment contributions to 403(B) plans because of the EGTRRA change (the new definition under IRC 403(B)(3) now permits employer (not deferral) contributions to be made for a period of up to 5 tax years following the tax year in which the employee terminated employment. As Chuck said, the annual limit is based on 100% of the includible compensation earned in the last period that adds up to 12 full months of service. Caution has to be exercised not to give affected employees a cash option - e.g., employer contributions (often to replace unused leave pay where state law permits) must remain in the control of the employer. Very Hot Market - and one on which I get TONS of questions from interested employers, providers, and 403(B) practitioners. As an independent consultant, I have assisted in setting up such plans, discussed in depth with the IRS folks, and responded to questions galore. This is one of the hottest aspects of the EGTRRA changes in the public school segement.

457(B) governmental plans assets are not subject to the 10% premature distribution penalty tax; however, if those assets are rolled over to an IRA, or a qualified or 403(B) plan, then the 10% penalty tax will apply to those amounts after the rollover (unless, of course, the participant is over age 59 1/2 or otherwise qualifies for an exemption to that additional tax).

What is the new guidance that permits amounts to be rolled over using plan termination as a qualifying event? Yes, I know that 90-24 transfers are permitted; however, that doesn't appear to be relevant to the removal of the assets from the plan. Thanks!

mjb, have you seen something new on the termination of a 403(B) plan? We have long awaited IRS guidance for the termination of 403(B) plans, but, unless something has been issued very recently, we have none. In the absence of guidance, my understanding is still that termination is not a qualifying event for distributions - and, that the ERISA requirements will still apply until such time as participants otherwise become eligible for a distribution.

Info in those instructions says: No schedules, no accountant's opinion - answer questions 1-5 and 8 only. (So easy, many employers prefer to do their own rather than paying to have it done - unless done pretty inexpensively) Incidentally, if this is not a 403(B) ERISA plan, no 5500 at all - I mention that because some governmental groups were told (by those who should know better) that a 5500 is required for the 403(B) plan. Not true.

I agree with mjb. I am seeing many cases where a 501©(3) stopped contributions to a 403(B) plan, installed a 401(k); then encountered unhappy HCEs who were then limited on the 401(k) deferrals. Then, there's the administrative costs of filing a full-blown 5500 in the 401(k)with schedules/independent audit reports, etc. etc. In a 403(B), there are no schedules, no independent audit, and only 6 (or is it 7) simple questions to answer. Anyone can quickly do that form! There is also the need to continue to administer the "frozen" 403(b)in accordance with ERISA requirements. Those same employers are now terminating the 401(k) to once more offer the 403(B) plan and wishing "someone" had explained both the pros and cons. If you have explained the upsides and downsides of this action, and the employee still wants the 401(k)for the greater investment options, fine. But you do want to be sure that you have so done!

Ralph, while CA Insurance Code Section 770.3 currently provides that "the employee shall have the right to designate the licensed agent, broker, or company" for the purchase of tax-sheltered accounts under 403(B), an attorney general's opinion also gives the employer the right to require that providers sign a Hold Harmless/Service Provider Agreement. Many of the CA Districts specificially prohibit the inclusion of life insurance in 403(B) plans for many, many valid reasons, including the necessity of reporting PS-58 costs - and the concerns about compliance with the limitations for the life insurance. I have not heard of any difficulties for those districts who prohibit life insurance.

Thank you very much. The list is growing - but, it is slow going.