What are the new IRS regulations for 403(b) retirement plans?
A brief summary of the most significant 403(b) regulation changes. This has been adapted from information provided by Guidestone Financial Resources.
• Written plan requirement. Churches that sponsor a 403(b) plan must maintain written documents that describe all material plan provisions.
• Contract exchanges and plan-to-plan transfers. Participants, employers and plan providers now face new requirements if a plan allows participants to transfer 403(b) funds in their retirement account from one plan provider to another. Employers with multiple providers will need to enter into information sharing agreements with all approved providers, and participant transfers along with certain other participant transactions will now require employer consent. (These new rules do not apply to rollovers between retirement plans.)
• Timing of in-service distributions from employer contribution accounts.
This provision impacts plans that allow employees to withdraw employer-contributed dollars while still in service to that employer without the occurrence of some event, such as reaching a specified age.
• New definition of severance from employment. The new regulations provide additional clarity to legal terms and phrases, one of which is “severance from employment.” For most churches this change will have no impact. But for churches that have complex legal structures, hierarchical organizational structures or separate subsidiaries, there may be some impact.
• Requirement to follow plan terms. As mentioned earlier, all 403(b) plans must be documented in writing. A failure to follow these written plan provisions can result in adverse tax consequences for individual plan participants and/or all plan participants, depending upon the nature of the failure.
What actions should churches with 403(b) plans take to comply with the new IRS 403(b) regulations?
• Stay informed. While the new IRS 403(b) regulations have been released, guidance is still unfolding.
• Develop written polices and procedures. Your church must develop and maintain written rules and procedures that address:
Which employees are eligible to participate in the retirement plan?
What contributions will the employer/church make on behalf of employees?
Will the church use a sole provider for the plan or allow multiple plan providers? (A decision to allow multiple providers will require the church to enter into information-sharing agreements with all approved providers as well as assume responsibility to work with each provider to insure plan compliance.)
• Become familiar with the new contract exchange and plan-to-plan transfer requirements. Participants, employers and plan providers have more steps to complete if your church allows plan participants to move or transfer money from one employer-sponsored provider to another.
• Review plan terms. As can be expected, the IRS mandates that your church administer its 403(b) plan in the way it is written. This dovetails with the earlier point that the church must maintain a written plan that meets certain legal standards. The plan must have all the right provisions and those provisions must be followed. Disregarding
this requirement is deemed an “operational failure.” Certain failures by the employer in following the plan could adversely affect every individual for which the failure occurred.