Plan document for governmental plan

[Guest JBeck]

Governmental 403(b) plan solely provides for 403(b) deferrals. One of the vendors provides mutual funds as an option, and the other vendors provide annuity contracts. The 403(b) program does not have a plan document. I know that with annuity contracts, there is enough language in the contract to describe the 403(b) restrictions, but what about the mutual funds? How do the mutual funds describe the 403(b) restrictions? Am I forced into writing a plan document just for the mutual funds?

[Everett Moreland]

Some mutual funds provide individual 403(b) custodial agreements for each participant. These are similar to an IRA custodial agreement or a 403(b) annuity contract. If you want a group custodial agreement with the mutual fund (in case of a governmental plan I can't think why you would), you might need to draft it for the mutual fund. The custodian (whether you use individual custodial agreements or a group custodial agreement)l will need to meet the requirements to qualify as a custodian. A plan document is not required, but I think having a plan document is a good idea, whether you use individual custodial agreements or a group custodial agreement.

[mbozek]

At the present time plan documents are not required by IRS rules. Some employers refuse to adopt a plan document because of state law liability issues, e.g., they do not want to be deemed a fiduciary so the custodian for the mutual fund family signs an agreement with the participant that has all of the necessary IRS language required for 403(b) plans.

Individual custodial agreements for 403(b) plan participants are quite complicated since the fund custodian will perform administrative functions normally performed by the plan admin or sponsor.

[Everett Moreland]

I think a plan document can be adopted in this situation without increasing the employer's liability. Because the plan document is not needed (all the required language is in the custodial agreement), the plan document does nothing more than describe what happens on the employer's and employees' end. It describes such things as the employees eligble to contribute, the procedure for making contributions, and what the employer will do with the contributions. Such a plan document serves to communicate to employees the basics about contributing to the plan and gives instructions to the employer about what the employer needs to do to satisfy the requirements in IRC Section 403(b).

[mbozek]

Counsel in several states (CA) have advised public employers against sponsoring or participating in salary reduction DC plans (other than remitting salary reduction to a fund) because of legal precedents that would make the employer a fiduciary if it performed functions of a sponsor or made decisions such as selecting plan investments. In some states the public retirement system is the plan admin/sponsor and the employer is only obligated to remit the contributions to the system. The employer does not need a plan document to limit employee contributions to the maximum permitted under 402(g). All of the applicable provisions of IRC 403(b) can be contained in the custodial agreements with employees and the salary reduction agreement.

The problem with these arrangements for the employee is that there is no accountability to limit employee loans to the limits under 72(p) where there are multiple vendors since each vendor applies the loan limits separately. The employer is not involved in the loan since the employee applies directly to the fund and not the employer.

[Guest Joel Lee]

The 403(b) program does not have a plan document. I know that with annuity contracts, there is enough language in the contract to describe the 403(b) restrictions, but what about the mutual funds?

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JBeck: You will find all the restrictions for 403(b) mutual fund investing in the Custodial Account Agreement. This agreement is required under section 403(b)7. Check it out.