Final Regulations Concerning 403b Retirement Plans
Effective January 1, 2009, new regulations pertaining to 403b tax-sheltered annuity arrangements will go into effect. Tax-sheltered annuity arrangements include retirement plans offered by public educational institutions and certain tax-exempt organizations.
Section 403b of the Internal Revenue Code provides that certain contributions made to funding arrangements offered by public educational institutions and certain tax exempt organizations may be excluded from gross income. There are three types of funding arrangements to which this applies – annuity contracts issued by an insurance company, custodial accounts that are invested in mutual funds and retirement income accounts (for church employees and ministers). Contributions that may be excluded from gross income include employer non-elective contributions and elective deferrals.
The new regulations will have the effect of updating the rules and compliance procedures that schools will be required to follow. Over the last 40 years, these plans have not been subject to the same rules as 401k plans. Now, contracts issued under this code section must be issued pursuant to a written plan, which describes the responsibilities of all parties involved in implementing the plan. Schools must provide all rules to their employees and oversee transfers from one plan to another.
The final regulations also provide for a non-taxable transfer or exchange of plan assets within the same plan (i.e. one investment for another) or a transfer of assets from one plan sponsor to another. For exchanges or transfers out of a plan, which may occur after a distributable event, a plan participant can complete a non-taxable transfer to a rollover IRA.
For an exchange of plan assets within the same plan, one 403b contract could be exchanged for another, without inclusion in income, provided the new contract had distribution restrictions that were at least equal to the restrictions of the former contract. These exchanges, associated with Revenue Ruling 90-24, applied to in-service transfers or exchanges. Under the new regulations, an exchange of one contract for another is provided if it constitutes a change from one investment product to another and the new contract has distribution restrictions that were at least equal to the restrictions of the former contract. In addition, the issuer of the contract or the investment company receiving the assets must have a written agreement in place under which the employer and the investment company may provide each other with certain information over time.
For in service, plan-to-plan transfers, where a participant is an employee or former employee of the employer, the new regulations provide that asset transfers may be made from one 403b plan to another. Transfers from one plan to a qualified plan, an eligible plan under section 457b or any other non-403b plan are not permitted. After the occurrence of a distributable event, such as reaching age 59 or severance from employment, plan participants can still rollover their assets to an eligible IRA.
The final regulations essentially have the effect of imposing new rules and requirements on retirement plans offered by public educational institutions. After these new rules take effect, there will be a lot of money in these plans that are no longer in compliance with the final regulations. If you are a participant in a 403b plan, as an employee of a public educational institution, you must become aware of these rules and how they may apply to you and your 403b plan.
Bill Griffith, Jr., CFP®,
is principal of W.E.
Griffith & Associates, LLC
, a wealth management firm in Washington, Pennsylvania. He has been
providing specialized strategies and services for ensuring long-term
financial independence and security for many years. He has written
numerous articles about various topics relevant to personal finance,
retirement and investment planning and is author of the books Securing
a Retirement Income for Life
and More
Money for Retirement Right Now.
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