Information Sharing Agreement Deadline

[Appleby]

From : http://www.plansponsor.com/pi_type11/?RECORD_ID=43488

IRS’ Architect Dispels Myths about 403(b) Regs

October 17, 2008 (PLANSPONSOR.com) – Sponsors of and advisers to 403(b) plans recently got some clarification regarding compliance directly from one of the “architects” of the new regulations.

Information Sharing

The biggest sigh of relief came after Architect's response to those who think that if they do not have an information sharing agreement (ISA) in place with every vendor under the 403(b) plan by 1/1/2009, they will fall out of compliance. Architect told Symposium attendees that the regulations do not say that ISAs have to be in place by January 1.

Further, Architect pointed out, Chapter 10 of the new regulations, which replaces Revenue Ruling 90-24 on contract exchanges, says unless there will be new service contract exchanges between approved vendors and non-approved vendors going forward, sponsors will not need ISAs with the non-approved vendors. In addition, Chapter 3 of the new regulations says the plan sponsor and vendor may assign responsibility for monitoring 403(b) transactions and does not require a formal ISA, according to Architect.

All this is very good news to those sponsors worried that a vendor that will no longer be used going forward will not sign an ISA.

So why does almost everyone else and their mothers think that the ISA must be in place by 01/01/2009?

From what I gather from reading the regs and the Rev proc, an ISA must be in place by 01/01/2009- at least for runaway accounts. The rest I am still trying to figure out.

[J Simmons]

For plans that will not be frozen or terminated before 2009, for ongoing contributions after 12/31/2008 it is a prudent thing for the ER to get an ISA signed with a vendor before sending post-2008 contributions to that vendor. But if no new contributions will go to that vendor, not having an ISA with that vendor by 1/1/2009 will not equate with noncompliance.

[ERISAnut]

Bob stated that while the information sharing agreement wasn't necessary for the members of the selected providers, there was still the responsiblity of each member to ensure overall compliance with the rules.

As a practical matter, an information sharing agreement is among the few alternatives available to effectively ensure loan limits aren't exceeded and improper distributions aren't made.

Now, for going outside the selected provider list, the information sharing agreement would be necessary in order to ensure compliance. Inside the selected provider group, such agreement is not required, but is likely the most effective mechanism to ensure compliance.

So, you are right, but the ISA is just a safe guard. It is basically being over-protective since is really isn't required for members fo the selected group.

[J Simmons]

For post-2008 contributions to a 403b contract to be tax deferred (or treated as after-tax Roth), that 403b contract must be "maintained pursuant to a plan". Treas Reg § 1.403(b)-3(a) and -3(b)(3). That plan may allocate administrative duties to other parties, other than the sponsoring employer--except that no such duties may be put on the participating employees. Treas Reg § 1.403(b)-3(b)(3)(ii).

The 403b regs do not describe what steps or characteristics must apply for a 403b contract to be "maintained" pursuant to a plan as compared to a 403b plan that is not. Rev Prov 2007-71, section 8.01 requires an employer to make reasonable, good faith effort to include in the employer's 403b plan each 403b contract to which any post-2005 contributions have been applied. Bob has repeatedly said that the effort does not have to be successful. Ergo, there could be some such 403b contracts that are not successfully included in the employer's 403b plan. While section 8.01 describes what a reasonable, good-faith effort is, there is no explanation of when a 403b contract is successfully included in the employer's 403b plan or under what circumstances a 403b contract is not.

To assure compliance of those duties that the plan places on the 'selected' 403b providers, the plan's sponsor needs some contractual assurances from those 403b providers that will receive those post-2008 contributions that the 403b providers will take those steps necessary as to their 403b contracts in compliance, regarding, for instance, issues involving loans, distributions, exchanges, etc. That requires that there be information sharing between the sponsor and the 403b providers, such as about how much the employee might have out in loans from other 403b contracts maintained pursuant to the plan.

Unfortunately, the closer we get to 1/1/2009, the more that it is becoming apparent that the 2007 regs and Rev Proc 2007-71 do not provide adequate guidance for employers to achieve compliance.

[ERISAnut]

Unfortunately, the closer we get to 1/1/2009, the more that it is becoming apparent that the 2007 regs and Rev Proc 2007-71 do not provide adequate guidance for employers to achieve compliance.

Even Bob Architect agrees with this. This issue you just illustrated is that prior to 2009, a 403(b) cannot be 'terminated' since it is not a plan. This one premise has served to upset the entire 403(b) world. Beginning in 2009, terminating a plan would require all assets get distributed within 12 months. So, what does that say about 403(b)s that were terminated in prior years?

It says that regardless of what one may believe, those arrangements were not terminated; but merely frozen. It also says that they are required to be written because they are 403(b)s that have not been terminated. However, any accounts that existed and were inactive prior to 2005, they do not have to be considered. There is a serious issue with contracts for employees after 2005; where a plan is required to be written.

JSimmons, I am with you; the rules appeared to have created more problems that they solve. But, these are the rules as communicated (informally) by the IRS. I do not believe many of these are enforceable because they are impossible to comply with in many instances. However, going forward, the projection is that the industry will begin to produce products and programs to operate consistently with these rules; making 403(b)s more controllable. As it stands now, for every rule stating one thing, there is another stating the opposite.

[J Simmons]

ERISAnut,

So which 403b contracts are included in an ER's 403b plan? (Rhetorical inflection.)

It would seem a real stretch to say that 403b contracts that are not included in an ER's 403b plan are nevertheless assets of that 403b plan that must be distributed in a reasonable time in order for there to be a 403b plan termination (an "access event" as Bob terms it for those active EEs under age 59 1/2).

Bob concedes that not all post-2004 403b contracts will be successfully included in an ER's 403b plan (and that's okay for the non-included 403b contracts, so long as the ER made a reasonable, good-faith effort to include them). So do the assets of the non-included 403b contracts prevent a 403b plan termination if all of the assets of the included 403b contracts would otherwise be timely distributed?

Would it belie the claim that the ER made a reasonable, good-faith effort if in trying to include the post-2004 403b contracts the ER asked the vendor and EE to subordinate those 403b contracts to a plan document that were to give the ER the unilateral power to terminate and direct payout? (I realize Bob says that the model plan language of Rev Proc 2007-71 that the ER can terminate, but only subject to the individual contracts--but what if I don't include that clause? The regs do not require that clause. Rev Proc 2007-71 does not require that clause?)

What is the IRS' motive in introducing a dramatically new regulatory scheme but then hamstring the ERs that operated under the old one from being able to terminate? Is it to punish them for having operated a 403b plan under the previous scheme?

Actually, ERISAnut, all the foregoing questions are rhetorical. Chalk if up to practical frustration with regs and guidance that are not even internally consistent. I'm use to better (albeit not perfect) from Treasury regulations.

[Appleby]

I found out what Mr. Architect ( Isn’t it uncanny that his name is Architect and he is the one of the drafters of the regulations? Something to be said for destiny)…

Anyway…he explained in another presentation that there are two types of agreement.

One, is the Information sharing agreement that must be in place for post 09/24/2007 90-24 exchanges to a non-approved vendor. This ISA governs that particular account/exchange. Treas. Reg. 1.403(b)-10.

The other is an agreement to exchange information and to share responsibilities . This need not be in place by January 1, 2009. This is the agreement 1.403(b)-3.

Apparently, there is confusion which leads some to believe that these are one and the same, and the confusion has lead to a misunderstanding that the 01/01/09 deadline applies to both agreements.

[Guest mjb]

I found out what Mr. Architect ( Isn’t it uncanny that his name is Architect and he is the one of the drafters of the regulations? Something to be said for destiny)…

Anyway…he explained in another presentation that there are two types of agreement.

One, is the Information sharing agreement that must be in place for post 09/24/2007 90-24 exchanges to a non-approved vendor. This ISA governs that particular account/exchange. Treas. Reg. 1.403(b)-10.

The other is an agreement to exchange information and to share responsibilities . This need not be in place by January 1, 2009. This is the agreement 1.403(b)-3.

Apparently, there is confusion which leads some to believe that these are one and the same, and the confusion has lead to a misunderstanding that the 01/01/09 deadline applies to both agreements.

So when are written agreements to exchange to information under reg 1.403b-3 supposed to be adopted, if not 1/1/09?

Is the plan document required to be adopted by 1/1/09?

Is the agreement to exchange information part of the plan document?

Can the plan remit contributions on or after 1/1/09 to a vendor who has not signed an agreement to exchange information?

If the vendor has not signed an agreement to exchange information by 1/1/09 is the vendor required to be listed as a contract under the plan under reg 1.403b-3?

Every communicaton issued by the IRS rasie more questions that it answers, e.g., notice 2001-71 Section 8 on grandfathered and orphan plans.

The more I review the IRS' many bungled attempts to administer these incomprehensibly written and burdensome regs (e.g., reg. 1.403b-10 termination of a plan funded with annuity contracts before or after 1/1/09) the more I believe that it assigned the responsibility to the most inarticlulate and communications challanged personnel it could find.

[J Simmons]

So when are written agreements to exchange to information under reg 1.403b-3 supposed to be adopted, if not 1/1/09?

Before that vendor may accept an exchange after 9/24/2007 or new contributions after 12/31/2008

Is the plan document required to be adopted by 1/1/09?

Yes

Is the agreement to exchange information part of the plan document?

No

Can the plan remit contributions on or after 1/1/09 to a vendor who has not signed an agreement to exchange information?

No

If the vendor has not signed an agreement to exchange information by 1/1/09 is the vendor required to be listed as a contract under the plan under reg 1.403b-3?

No

Every communicaton issued by the IRS rasie more questions that it answers, e.g., notice 2001-71 Section 8 on grandfathered and orphan plans.

The more I review the IRS' many bungled attempts to administer these incomprehensibly written and burdensome regs (e.g., reg. 1.403b-10 termination of a plan funded with annuity contracts before or after 1/1/09) the more I believe that it assigned the responsibility to the most inarticlulate and communications challanged personnel it could find.

Amen.

[Guest mjb]

Why cant the IRS provide these same answers in an authorative form, e.g., a rev ruling, so that plan sponsors can rely on the answers without fear of DQing their plans on 1/1/09 instead of issuing pronouncements by some mid level GS fuctionary that have no precedential value.

[J Simmons]

mjb,

We're not alone in wondering why.

[Appleby]

So when are written agreements to exchange to information under reg 1.403b-3 supposed to be adopted, if not 1/1/09?

Before that vendor may accept an exchange after 9/24/2007 or new contributions after 12/31/2008

From what I understand, 1.403(b)-3 does not address exchanges that occur 09/25/07 to 12/31/08. These are addressed under Treas. Reg. 1.403(b)-10. For transfers that occur 09/25/07 to 12/31/08, the Information sharing agreement (ISA) must be in place by 01/01/09. This does not have to be a 'formal' ISA. However, if the ISA is not in place by 01/01/09, then the account must be re-exchanged to an approved vendor by 01/01/09.

The 'old' 09/24 exchanges will no longer be permitted as of 01/01/09. Instead, there is a new type of exchange. Exchanges between approved vendors is considred an exchange of investment, and an ISA is not required.

As of 01/01/09, if an exchange occurs to a non-approved vendor, a formal ISA must be in place. The ISA brings this account under the plan. This would be in place at the time (of before) the exchange occurs. The point of this agreement is to deem these new accounts to be brought under the plan.

As to 1.403(b)-3… (3) says in part “A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan.” ...(ii) of that section discusses the assignment of responsibilities. I think this is the other agreement to exchange information to which Architect refers ( agreement on who is responsible for what administrative functions, and to provide certain informtion to stakeholders). It says in part …” A plan is permitted to assign such responsibilities to parties other than the eligible employer...and may incorporate by reference other documents, including the insurance policy or custodial account, which thereupon become part of the plan.” So it seems the account becomes part of the plan, when this agreement ‘entered upon’, which can mean the employer attaching a copy of the annuity/custodial agreement to its ‘plan agreement ’. Recall that the 403(b) document need not be a formal document, but can be a bunch of papers, annuity and custodial agreements, forms and such paper-clipped together. But, if the Vendor is not part of the plan, and a contract exchange occurs to that Vendor, then an ISA is required in order to bring that acocunt under the plan. Since this exchange will be ocurring 01/01/09, then the agreement cannot be in place by 01/01/09, but should be in place in order to permit the exchange...and unlike the exchanges that occur 09/25/07 to 12/31/08 which does not require a formal agreement, this exchange does require a formal agreement.

[J Simmons]

From what I understand, 1.403(b)-3 does not address exchanges that occur 09/25/07 to 12/31/08. These are addressed under Treas. Reg. 1.403(b)-10. For transfers that occur 09/25/07 to 12/31/08, the Information sharing agreement (ISA) must be in place by 01/01/09. This does not have to be a 'formal' ISA. However, if the ISA is not in place by 01/01/09, then the account must be re-exchanged to an approved vendor by 01/01/09.

The 'old' 09/24 exchanges will no longer be permitted as of 01/01/09. Instead, there is a new type of exchange. Exchanges between approved vendors is considred an exchange of investment, and an ISA is not required.

As of 01/01/09, if an exchange occurs to a non-approved vendor, a formal ISA must be in place. The ISA brings this account under the plan. This would be in place at the time (of before) the exchange occurs. The point of this agreement is to deem these new accounts to be brought under the plan.

As to 1.403(b)-3… (3) says in part "A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan." ...(ii) of that section discusses the assignment of responsibilities. I think this is the other agreement to exchange information to which Architect refers ( agreement on who is responsible for what administrative functions, and to provide certain informtion to stakeholders). It says in part …" A plan is permitted to assign such responsibilities to parties other than the eligible employer...and may incorporate by reference other documents, including the insurance policy or custodial account, which thereupon become part of the plan." So it seems the account becomes part of the plan, when this agreement 'entered upon', which can mean the employer attaching a copy of the annuity/custodial agreement to its 'plan agreement '. Recall that the 403(b) document need not be a formal document, but can be a bunch of papers, annuity and custodial agreements, forms and such paper-clipped together. But, if the Vendor is not part of the plan, and a contract exchange occurs to that Vendor, then an ISA is required in order to bring that acocunt under the plan. Since this exchange will be ocurring 01/01/09, then the agreement cannot be in place by 01/01/09, but should be in place in order to permit the exchange...and unlike the exchanges that occur 09/25/07 to 12/31/08 which does not require a formal agreement, this exchange does require a formal agreement.

Prior to 9/25/2007, an employee could exchange his/her 403b contract to a vendor of which the employer had no involvement at all. These were "90-24 exchanges", as made per Rev Rul 90-24. The new, 2007 regs took this away, effective 9/25/2007.

If an employee has since 9/24/2007 made a 403b contract exchange to a vendor that does not have an information sharing agreement in place, the situation may be corrected either by the employer and vendor entering into an info sharing agreement by 6/30/2009 or the employee re-exchanging the 403b contract by 6/30/2009 to be with a vendor that in fact does have an info sharing agreement in place with the employer. Otherwise, the 403b contract will turn into a pumpkin and be taxable income as not maintained pursuant to an employer's plan.

The info sharing agreement might include an assignment of duties, but not necessarily so. Some of the vendors' proposed info sharing agreements basically provide nothing more than that the vendor and employer will share what info the regs require. For example, see the Vanguard one on its website. The reference in -3(b)(3)(ii) is to administrative tasks, which cannot be placed on the employee--yet some vendors by many pre-regs 403b contracts put some such responsibilities on the employee. So beware of incorporating those by reference into an employer's 403b plan documentation.

Also, if you go the multi-document approach, you'll likely spend much more time making sure the montage is consistent and covers the issues that are addressed in -3(b)(3)(i) than in simply preparing a single, "integrated" document.

[Appleby]

Prior to 9/25/2007, an employee could exchange his/her 403b contract to a vendor of which the employer had no involvement at all. These were "90-24 exchanges", as made per Rev Rul 90-24. The new, 2007 regs took this away, effective 9/25/2007.

90-24 remain on the books until 12/31/08. The difference between those that were completed by 09/24/07 and those that are completed between 09/25/07 -12/31/08 is the the former is grandfathered- which means no agreement is required and the latter is not grandfathered, requering an ISA.

the regs intended to take away 90-24 trasnfer as of 09/25/07, but they continue to occur after that; hence the reason they were addressed in Rev proc 2007-71.

See Section 8