Council for Health and Human Service Ministries

The Pension Boards Corner

IRS Issues Final 403(b) Regulations

In July 2007, the IRS finalized 403(b) regulations that were proposed almost three years earlier. The 403(b) regulations govern the taxability and operation of retirement plans subject to Internal Revenue Code ("Code") section 403(b).

Many non-profit organizations and churches, including the United Church of Christ and UCC-related ministries that are CHHSM members, sponsor and maintain 403(b) plans for their employees. Therefore, it is very important for CHHSM members that sponsor 403(b) plans to be aware of and fully comply with the final 403(b) regulations so their retirement plans may continue to experience tax-favored treatment.

Highlights of the final 403(b) regulations include:

  • Written Plan Requirement - For the first time, there is a tax law requirement that a 403(b) plan have a written plan document and that the plan be operated in accordance with that document. The written plan document must include all material provisions, including eligibility, benefits, limitations, investments available under the plan and distributions. The plan document must allocate responsibilities between the employer, the service providers and the participants. Other documents (such as annuity contracts) may be incorporated into the document by reference. The plan document for a church retirement income account under Code section 403(b)(9) must state the intent to constitute a retirement income account.
  • Exclusive Benefit Requirement - All 403(b) plans, including church retirement income accounts, are subject to the exclusive benefit rule. The exclusive benefit rule provides that assets held in the account cannot be used for, or diverted to, purposes other than for the exclusive benefit of plan participants or their beneficiaries. Assets are treated as diverted to the employer if the employer borrows assets from the account.
  • Nondiscrimination Rules - For 403(b) plan sponsors that are subject to nondiscrimination rules, the final regulations make clear that nondiscrimination rules similar to those governing profit-sharing plans are applicable except for elective deferrals which are governed by the universal availability requirement, discussed below. While churches are generally exempt, the nondiscrimination rules apply to many church-related ministries. For example, a UCC-related ministry that sponsors a 403(b) plan is subject to the nondiscrimination rules if the ministry offers goods, services, or facilities for sale, other than on an incidental basis, to the general public and normally receives more than 25 percent of its support from either (i) governmental sources, or (ii) receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, or both.
  • Universal Availability - Elective deferrals are not subject to nondiscrimination rules if the right to make elective deferrals of at least $200 per year is effectively available to all employees. The final regulations permit geographically and functionally distinct units to apply the universal availability requirement separately. The employer may exclude certain types of employees (e.g., employees who normally work fewer than 20 hours per week; non-resident alien employees) from the 403(b) plan in determining whether the universal availability requirement is met. To meet the universal availability requirement, the employer must annually notify all eligible employees of the right to make elective deferrals under the 403(b) plan.
  • Controlled Group Rules - The final regulations introduce controlled-group rules for tax-exempt entities. The ability to control 80% or more of the board of directors or trustees of a tax-exempt entity will result in the application of the controlled-group rules.
  • In-service Transfers - In-service transfers (formerly governed by Revenue Ruling 90-24) will continue to be allowed only if there is a written agreement between the employer and the vendor that permits the sharing of employee information so that the eligibility and distribution rules of the plan may be followed.
  • Catch-up Coordination - Some 403(b) plan participants are eligible for two separate catch-up contributions and the final regulations address the coordination of those catch-up provisions. The final regulations specify that the special 15-years of service catch-up (which is available to the UCC and to certain UCC-related ministries) must be applied before the age 50 catch-up is applied.
  • Plan Termination - A 403(b) plan may terminate if certain rules similar to the 401(k) successor rules are followed. Before the final 403(b) regulations, there were questions with respect to whether and how a 403(b) plan could terminate.
  • Effective Date - The final regulations are generally applicable for plan years beginning after December 31, 2008 (i.e., January 1, 2009 for most 403(b) plans), however, the new rules for in-service transfers apply to transfers occurring after September 24, 2007. 403(b) plan sponsors may operate under the final regulations before the effective date if the final rules are applied on a consistent and reasonable basis.

The Pension Boards - United Church of Christ stands ready to assist you in making sure that your 403(b) retirement plan complies with the final 403(b) regulations. For more information, please contact either Don Barnes, Vice President, at (212) 729-2720, or James T. Herod, J.D., LL.M. (Tax), CEBS, General Counsel, at (972) 437-3012.

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