GUST 403(b)

[Guest sroenigk]

Are 403(B) plans required to be amended for GUST?

[Appleby]

I think not.

Unlike qualified plans, most 403(B) plans does not, and are not required to have a plan document- therefore...

I will double check my sources tommorrow

[MWeddell]

As far as the IRS is concerned, a 403(B) plan does not need to have a plan document. Therefore, the IRS did not feel it had statutory authority to create a GUST remedial amendment period for 403(B) plans. There was a provision or two that should have been changed in the 403(B) contract, but that was a few years ago, perhaps by the beginning of the 1998 plan year (?) when that had to be done.

For 403(B) plans that are subject to ERISA, they must have a plan document but exactly when the document should be updated for GUST is unclear.

[Guest sroenigk]

The following quote is from the above conference in Chicago.

"Session 10. GUST Amendments - The Deadline is Approaching. Speakers: Craig Hoffman, Esq., APM, SunGard Corbel...

Page 6. E. Special Rules for 403(B) Plans

1. Unfortunately, IRC 401(B) only applies to retirement plans which qualify for favorable tax treatment inder the rules of IRC 401(a). Hence the statutory deadline found in SBJPA and TRA '97 would apply to 403(B) plans.

2. It is still not clear whether 403(B) plans and/or contracts need to be amended by the first day or the last day of the applicable plan year. In the absense of IRS guidelines, it would apprear prudent to take action sooner rather than later."

Does anyone agree with the above statement? Does this mean 403(B) plans need to be amended for GUST? Thank you for your advice.

[MWeddell]

Let me try again, although I realize you probably are asking for others' opinions.

Rev. Proc. 97-41, Section 1.02(4) provides that SBJPA amendments to 403(B) plans or 403(B) annuity contracts are not required before the first day of the plan that began on or after 1/1/1998. However, there's nothing in the Code that requires that a written 403(B) plan exist in the first place and therefore nothing in the Code that could possibly require that such a plan be amended. Conversations with IRS officials confirm this. The only example given in the Rev. Proc. is (in Section 12.02) one that requires that a 403(B) contract be amended. Typically, the provider has taken care of this without even notifying the employer.

ERISA does require a written plan document (if one is dealing with a 403(B) plan that is subject to ERISA) so presumably if the plan rules change, so should the plan document. It's unclear when the plan document must be amended given that the DOL never announces its own remedial amendment period and any similar concept and any IRS pronouncements don't apply to ERISA.

[Guest RJT]

MWeddel is correct. There are no tax consequences of failing to have a proper 403(B) plan document. The Code only requires that the annuity contract (or custodal account) has certain minimal terms. As long as the plan is administered in accordance with the GUST rules, the plan is irrelevant for tax purposes.

The Title 1 problem is minor as well. If there were certain rights that were required to be granted, and as long as participants were granted the rights, the failure of the 403(B) document (if there is even one) to state the right might be a fiduciary violation but it is one without remedy. Craig mispoke at the ASPA conference.

[Guest Tom Geer]

The language of 403(B) has threshhold requirements that allow the exclusion from income, subject to the MEA or applicable limit of amounts becoming vested. These are (1) the employee is an employee and the employer is a permitted 403(B) sponsor, (2) the plan is not a qualified plan, (3) the plan has to be a church plan or meet the 403(B) coverage requirements, and (4) ifhe plan has salary reduction it meets the requirements of 401(a)(30) (that is, 402(g)(1)). If these requirements are met, the plan is a 403(B) plan and eligible for the exclusion. 402(g)(1) was amended, but only to liberalize, so any current plan language will be in compliance with 402(g)(1), 401(a)(30) and 403(B)(1)(E).

However, if you allow deferrals in excess of the pre-EGTRRA limits or apply the post-EGTRRA limits on exclusion, the IRS could take the position that the deferrals and/or contributions are not made under the plan and are thertefore taxable under 403©. In theory they could apply this to either the excess or to the entire amounts.

Also, the ERISA plan document issue is not trivial. Employees have the rights set forth in the plan documents. If, as will sometimes be true, the new limitations are less than the old MEA for a participant, an employer who applies the new limitations will run the risk that the employee is entitled to the higher amount under the old limitations. Of course, this applies only to employer money.

In addition, the IRS has taken the position in the qualified plans area that administration of a plan in compliance with its terms is a qualification issue (other than with respect to some provisions covered under remedial amendment period rules). Since 403(B) plans don't have a RAP, an extension of this theory to 403(B) plans would mandate amendment by 12/31/01.

On the other hand, IRS enforcement on 403(B) is still much more lax than with qualified plans, and IRS is inclined to give exempt employers the benefit of the doubt in most cases. However, imagine what they might do (other than have a cow) if a hospital-affiliated physician now does a full 403(B) and a full 457 at the hospital, then does a qualified plan for an outside practice.

Discretion being the better part of valor, we are recommending a simple EGTRRA compliance amendment to our 403(B) clients. We will base most of it on the EGTRRA model amendment the IRS says it will issue in August.