By Anna M. Hunter, CPA, CPC, QPA
Director, Witt Mares Pension Designs, LLC
As Published in Virginia Business
The IRS has extended the deadline for not-for-profit organizations with 403(b) retirement plans to comply with the Final 403(b) Regulations. Here are some things you should be doing now to prepare if your organization has a 403(b) plan:
- Ensure a written Plan Document is in place no later than December 31, 2009;
- Determine if the plan will be subject to ERISA; and
- Locate the plan assets and contact the asset vendors.
Plan Document
A written plan document must be adopted before December 31, 2009 for any 403(b) Plans with contributions after December 31, 2004. Many vendors offer a 403(b) plan document. Contact each of your vendors and determine if a plan document is available for your use that is general enough to allow for additional vendors. Review the terms of the document thoroughly to be sure the language is compatible with the terms of the other vendors in your 403(b) plan. If not, consider limiting the plan vendors to those who can stay in the terms of your new plan document.
ERISA – Does It Apply?
Title I of the Employee Retirement Income Security Act (ERISA) applies to your 403(b) plan unless it qualifies for an exemption. Governmental and church plans are generally already exempt. For any other not-for-profit entity to be exempt from ERISA Title I, the 403(b) plan must comply with all of these requirements:
- Only voluntary employee salary deferral elections are allowed;
- There is no additional employer paid match or other employer contribution;
- Only the employee has enforceable rights under the terms of the investment contract;
- The employer receives no compensation and has very little plan involvement; and
- The employer should not be involved in making any plan distribution determinations.
Employers may intend for their 403(b) plan to be exempt from ERISA but through employer action forgo the exemption. A few examples of where the plan will not be exempt:
- If employee contributions are mandatory,
- If the plan allows hardship distributions and the employer makes the determination of the hardship, and
- If the employer limits the access of investment alternatives to the point where there is no longer a “reasonable choice” for the employees.
If the plan is subject to ERISA, then additional requirements apply to your plan. These requirements are similar to those found in a 401(k) plan and include:
- Nondiscrimination and coverage testing applies. If there are any “Highly Compensated Employees”, the plan could fail testing and ultimately subject the employer to liability.
- Fiduciary bonding of the employer will be required, so an insurance policy must be obtained.
- Full annual reporting will be required, and a plan with 100 or more eligible participants must have an independent audit. This will increase the expense of operating the plan and add the burden of having the plan audited each year.
- The Joint & Survivor Annuity rules apply. This means spousal consent will be required for distributions.
Vendor Contact
Now is the time to determine the location of all your 403(b) plan assets. It is very common to have multiple vendors, and if your plan is subject to ERISA, it will be necessary for the first time, to report the total plan assets to the Department of Labor. This is one reason why the information sharing agreements between the not-for-profit employer and vendor are so important. Do not assume your current 403(b) vendor will continue to support 403(b) plans after December 31, 2009. With the added administrative responsibilities of the final 403(b) Regulations, some investment vendors are modifying or dropping their 403(b) platforms. Contact every vendor with plan assets and obtain copies of the current vendor custodial agreement. It will be necessary to determine if the terms of each custodial agreement coincide with those of your new written plan document.
If you need assistance working through this process, contact Witt Mares Pension Designs at (757) 873-1587.
This is an overview of some common retirement plan questions of not-for-profit organizations and may not include every aspect that should be considered.