December 22, 2004
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If finalized in their current form, the new regulations will lessen some of the differences in rules between 403(b) plans and 401(k) and 457(b) plans. But for most 403(b) plans that have been operating in compliance with guidance provided by TIAA-CREF, major changes are not likely to be required by the new regulations when they go into effect.
Here are some of the areas that the proposed regulations cover, with indications of potential changes in our current guidance to plans where applicable.
PLAN DOCUMENT REQUIREMENTS: The proposed regulations require that 403(b) contracts be maintained pursuant to a written plan document, with no exemption for governmental, church, or non-ERISA TDA plans.
For governmental and church plans that already have plan documents, this new rule is not likely to cause many problems. Plan documents will have to include basic plan provisions covering plan eligibility and benefit rules and list the annuity contracts and mutual funds offered under the plan. Plan documents based on sample plan document language provided by TIAA-CREF should meet these requirements. The proposed regulations do not mandate that all of the requirements be satisfied in a single document.
There are concerns that this change in the regulations may have the effect of making certain previously exempt tax-deferred annuity (TDA) plans subject to Title I of ERISA, since qualifying for the TDA exemption requires that employer involvement in the operation of the plan be limited. The IRS has requested comments on this issue. We are hopeful that the IRS will provide guidelines spelling out how sponsors of TDA plans can meet the plan document requirements without jeopardizing their ERISA exemption.
PLAN DOCUMENT AND ANNUITY CONTRACTS:
While the proposed regulations require that 403(b) plans (even those not subject to ERISA) be operated in compliance with a written plan document, they do not address the question of conflicts between plan provisions and annuity contract provisions. Provisions in the annuity contract will govern the relationship between the insurance company and participants and determine the form of benefits, even if these provisions differ from those found in the plan document. If plan and contract provisions differ, the plan will be out of compliance since it will not be operated in compliance with plan provisions. It is, therefore, critically important that plan sponsors ensure that the annuity contracts offered under their plan do not conflict with plan document provisions.
TIAA-CREF believes that its annuity contracts contain all of the contract provisions the regulations require to be included in any contracts used as funding vehicles for 403(b) plans, such nontransferability and nonalienation provisions, contribution limits, minimum distribution requirements, and rollover restrictions. We also make sure that language provided in our sample plan documents conforms to the provisions in our annuity contracts. But we cannot assure that the annuity contracts of any other carrier offered under the plan conform with our sample plan document language. We also cannot guarantee that there is no conflict between plan and contract provisions, if an institution does not use the sample plan document language provided by TIAA-CREF. Conflicts between plan documents and annuity contracts will often involve the timing and nature of distribution options. We suggest that plan sponsors carefully check for conflicts when comparing their plan documents and annuity contract provisions.
DELAYED VESTING: The proposed regulations provide that contributions to 403(b) plans will not be taxed under 403(b) until withdrawn, even if subject to delayed vesting, as long as they meet all other 403(b) requirements. But the regulations are not clear as to whether such contributions are to be counted for purposes of the IRC Section 415 limit when they are made or when they become vested. In response to inquiries since the regulations were issued, the IRS has preliminarily indicated that contributions are counted towards the 415 limit when made, whether vested or not. We will let you know if the IRS provides contrary guidance.
NONDISCRIMINATION TESTING: For the most part, 403(b) retirement plans are currently subject to the same nondiscrimination requirements as 401(a) retirement plans with three major exceptions:
Other changes in nondiscrimination rules included in the proposed regulations relate to the identity of the employer under the controlled group rules, the categories of employees that are excludable from the testing population, and the definition of part-time employees. None of these changes will affect nondiscrimination testing in plan years beginning before January 1, 2006. TIAA-CREF will be providing detailed guidance to administrators on all of the proposed changes in nondiscrimination testing in the near future.
CONTRIBUTION LIMITS: The proposed regulations contain guidance on the treatment of contributions in excess of the 415 limit, and the ordering rules for individuals who are eligible for both Special 15 Year Catch Up contributions and Age 50 Catch Up contributions. Under the ordering rule, if a participant eligible for both catch-ups contributes more than the general limit but less the maximum amount permitted, then the amount contributed in excess of the general limit is counted first against his or her 15-year lifetime limit. Generally, this is consistent with the guidance that we have provided on these issues and therefore will not require any changes by plans that are being operated in conformance with previous guidance from TIAA-CREF.
TRANSFERS AND EXCHANGES: Generally the rules for direct transfers or exchanges within a 403(b) plan or to or from a 403(b) plan to another 403(b) plan will remain the same as before under the proposed regulations. However, the new regulations would restrict transfers from a 403(b) plan to only those made to a contract that is attached to another 403(b) plan, thereby preventing transfers to unapproved funding vehicles.
WITHDRAWAL RESTRICTIONS: Currently, while most amounts in 403(b) plans may not be paid to participants except in the case of a "triggering event" such as disability, severance from employment or the participant reaching age 59½, these restrictions do not apply to employer contributions in a 403(b) contract. Under the proposed regulations, those employer contributions would be subject to withdrawal restrictions similar (but not identical) to those that apply to other types of 403(b) contributions. Plans that currently permit unrestricted in-service cash distributions or annuitization of employer contributions will have to be amended if this provision goes into effect. We believe that this change is inconsistent with statutory requirements and we will ask that the regulations be modified to remove these restrictions.
PLAN TERMINATIONS: The proposed regulations permit a 403(b) plan to terminate and distribute assets on termination if the employer does not establish another 403(b) plan. Previously, there was no statutory basis for 403(b) plan termination and plan termination did not constitute a triggering event that would permit distribution to participants.
TIMING OF CONTRIBUTION TRANSMITTALS: The new regulations require that plan sponsors transmit all contributions to 403(b) plans to the insurance company or other carrier as soon as is administratively feasible. For plans subject to ERISA, this will not require any changes since Department of Labor (DOL) regulations already require all elective deferrals to be remitted by the earlier of (1) 15 business days following the month in which the amount was withheld from the employee's pay, or (2) the earliest date on which it is administratively feasible to remit. But some institutions take longer to remit employer contributions, since they aren't subject to the DOL timing rule. And non- ERISA plans will also have to conform to the new timing rule.
FICA CONTRIBUTIONS: The IRS has also issued temporary FICA regulations that make it clear that all salary reduction contributions to 403(b) plans are considered wages for FICA tax purposes even if made under "one-time irrevocable salary reduction agreements" or "mandatory" plans. Nevertheless, employee contributions under these one-time agreements or mandatory plans are not to be treated as elective deferrals for purposes of the 402(g) limit on elective deferrals or for nondiscrimination testing. This new guidance is effective immediately but is consistent with TIAA-CREF's prior guidance on this issue.
The material above is a brief description of some of the potential effects of the proposed 403(b) and FICA regulations, which are still subject to change before they are finalized. We will be providing you with more specific guidance on selected areas of the regulations in the near future. However, TIAA-CREF can not provide legal advice and plan sponsors should consult with their own legal counsel to determine the impact of these regulations on their individual plan designs.
© 2008 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017
