Originally Published November 15, 2004
The Treasury Department issued today proposed regulations under Code section 403(b). That section generally makes provision for retirement savings through annuity contracts and mutual fund custodial accounts for employees of public schools and tax-exempt organizations, and through church retirement income accounts.
The proposal represents the first effort to issue comprehensive guidance under section 403(b) since 1964. The proposal would update the regulations for statutory changes from ERISA (enacted in 1974) through EGTRRA (enacted in 2001), consolidate intervening guidance issued in the form of rulings, conform the section 403(b) rules to those currently governing other retirement arrangements to the extent appropriate, and address additional issues now arising under section 403(b) programs. In scope, the proposed regulations consider the following issues, among others:
- Definitions of "annuity" and "custodial account," and special rules for church retirement income accounts, including the imposition of an "exclusive benefit" requirement for custodial and retirement income accounts. Life insurance, endowment, accident and health, property, casualty or liability contracts issued on or after February 14, 2005, are not treated as "annuities" under the proposed regulation. The practice of providing incidental death benefit protection through a life insurance contract coordinated with a section 403(b) annuity contract, which was allowed under private letter rulings issued ten or more years ago, is not explicitly addressed.
- The qualification requirements for section 403(b). The proposed regulations articulate, for the first time under the tax law, a written plan requirement under section 403(b), which may have adverse implications for private employers seeking to avoid the application of ERISA to their section 403(b) programs.
- Nondiscrimination with respect to nonelective contributions
. In an important change, the proposed regulations abandon the good faith standard of Notice 89-23 and require compliance with a specified set of section 401(a) nondiscrimination requirements.- Elective contributions
, including frequency of elections, changes and revocations; automatic enrollment and carryforward of existing elections; annual opportunity to make, revoke or revise elections; the compensation with respect to which elections can be made; an anti-conditioning rule; and correction of excess contributions. These rules are generally modeled on those applicable to section 401(k) plans. The proposed regulations also address the universal availability requirement, and include potentially helpful rules treating geographically and functionally distinct units separately for this purpose.- Other contributions requirements
, including the limits under sections 402(g) and 415, and a requirement that contributions be transmitted to the funding vehicle within a reasonable time.- Catch-up contributions
for employees age 50 or older (the general catch-up) and for employees of schools, hospitals, health and welfare service agencies (which are defined), and church-related organizations (the special section 403(b) catch-up); and coordination of those catch-up contributions. - Determining years of service for purposes of the special catch-up contribution and the rule permitting employer contributions on behalf of former employees for up to five years following termination of employment.
- Distribution requirements
, including timing restrictions on distributions attributable to elective contributions and other contributions; definition of "severance from employment" for section 403(b) purposes; written explanations for eligible rollover distributions; and required minimum distributions.- Loans
and qualified domestic relations orders (QDRO’s).- Taxation of section 403(b) arrangements
, including the tax consequences of failure to satisfy section 403(b).- Aggregation rules for tax-exempt entities
, including a common control rule if 80% or more of the directors or trustees are representatives of or directly or indirectly controlled by another exempt entity. These rules do not apply to certain church entities, and any guidance with respect to public schools is left to final regulations.- Plan termination
, and exchanges and transfers among section 403(b) vehicles.
The proposed regulations would take effect for taxable years beginning after December 31, 2005, subject to certain transition rules. The proposed regulations may not be relied upon in proposal solicits comments on certain issues – and a public hearing is scheduled for February 15.
Today the Treasury also issued temporary and proposed employment tax regulations that treat as FICA wages section 403(b) contributions not only when made pursuant to a conventional salary reduction agreement, but also when made pursuant to a one-time irrevocable election at commencement of employment or when made as a condition of employment. This definition is thus broader than the definition of "elective deferral" to which the special requirements of section 401(k) or 403(b) are applicable. The temporary regulation takes effect on November 16, 2004, and expires no later than November 17, 2007.
© 2004 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.