403(b) Plans – What you need to know

Final regulations that were adopted in 2007 take effect on January 1, 2009, for most tax-exempt organizations. 

What changed? How is your T-E organization affected?

The final regulations require all 403(b) providers, including churches, to have a plan document in place no later than 12/31/08. Failure to adopt a written plan before 1/1/09 will render all subsequent contributions to the plan to be fully taxable. The plan document must address several issues, including:

• Employee eligibility, Contribution limits, Distributions, Benefits, Salary reductions, Investments, Loans, Hardship withdrawals, Allocation of compliance responsibilities to employers and fund providers (vendors)

The IRS has made available a sample plan document that can be used by tax-exempt organizations: see IRS Publication 2009-3.   If a plan is established directly through a mutual fund or other investment company most of these third-party vendors have created generic plan documents for use by their clients.

The final regulations also require “large” ERISA-covered 401(b) plans (generally plans with 100 or more eligible employees) to file audited financial statements along with their 2009 Form 5500.  Small 401(b) plans (generally fewer than 100 eligible employees) are eligible for a waiver of the audit requirement but are required to file the Short Form 5500 (5500-SF) which includes aggregate financial information related to the Plan.

Additional changes are discussed in detail at http://www.irs.gov/retirement/article/0,,id=172433,00.html

If you need help in understanding these new reporting requirements, please contact me.