Making a change Featured

8:00pm EDT June 25, 2009

Earlier this year, several alterations were made to retirement plans in the U.S., making it more complicated to administer 403(b) retirement plans.

New guidelines for the 403(b) plan, which is comparable to the 401(k) plan but used by university, government, church and nonprofit employees, require more employer involvement in plan documentation and operation.

“Overall the rules are changing to make the 403(b) plans comparable to the 401(k) plans, and the differences between the two are being minimized,” says Michael Kozlowski, CPA, director of assurance and business advisory services with GBQ Partners LLC.

Smart Business spoke with Kozlowski about the changes made to the 403(b) plans, the benefits of these changes, problems that can arise from these new rules, and how these changes affect businesses and individuals.

What are the new 403(b) rules?

With a 401(k) plan, the plan sponsor uses a third-party administrator and investment adviser to help select various investment options, such as mutual funds, that participants can choose from. These investment options are usually held with one investment company who will administer the plan. The new regulations will encourage 403(b) plans to move toward this type of plan administration. The plan sponsor will be required to enter into written information sharing agreements as specified in the plan document. Exchanges by a participant will only be permitted if approved by the employer’s plan.

In the past, 403(b) plans didn’t necessarily require a written plan document, but all 401(k) plans have these documents, which have to be submitted to the Internal Revenue Service for approval. If your 403(b) is subject to ERISA, a written plan is now required and must be adopted by December 31, 2009. The plan must be in operational compliance by January 1, 2009. If there was an operational deficiency in 2009, that also has to be corrected or else there can be severe consequences. The plan may be disregarded and all participant accounts may become taxable. You need to make sure these plans have written documents and the compliance is followed.

What are the benefits of these changes?

The plan sponsor should now know where all the plan participants’ investments are located. Before, participants could potentially invest in whatever they wanted and the plan wouldn’t necessarily know where all the assets were. The plan could’ve had someone terminate and transfer out of an investment fund to a separate fund and the administrator may not have known that the funds were still plan assets. Now, the plan sponsor will be able to monitor the plan, follow the rules, and make the plan more universal.

What are some problems that may arise because of these changes?

There are new rules if the plan allows for loans or hardship distributions. Before, the plan sponsor had nothing to do with these distributions, that was handled between the participant and contract provider. Now, the employer will have to decide whether to permit these distributions, and if the plan allows, the employer has to determine if the employee is permitted to take the distribution. The employer will need to be more involved in the administration of the plan in order to make sure the rules are being followed.

Also, 403(b) plans will be subject to the same IRS Form 5500 filing requirements as 401(k) plans. If you have more than 100 participants, you will have to file the complete form. The complete form will require an independent audit report of the plan, which can be expensive. If you have fewer than 100 participants, you only need to file a short form and an audit report will not be required.

A plan participant is defined as anybody who’s eligible to participate in the plan, whether they’re participating or not. Anybody with an account balance is considered a participant, as well, including people who have left your company and haven’t taken their distributions out of the plan.

How do these changes affect businesses?

The employer is going to be responsible for more administration, documentation and oversight of the entire process. There’s also going to be more disclosure, so if your 403(b) allows for employee contributions, you will have to make sure all employees are notified of this on an annual basis.

Everybody who is a common-law employee will be eligible to make a contribution. Only permissively excluded individuals (employees eligible under other deferral plans, student employees or employees who ordinarily work less than a certain number of hours per week) may be excluded from the plan. You also need to perform discrimination testing if you make any sort of matching contribution or engage in profit sharing.

There’s also been a change regarding the timing of remitting employee contributions to the plan. Before, these contributions didn’t necessarily need to go into the plan right away. But now, if your 403(b) plan is subject to ERISA, contributions must be made to the plan as soon as administratively possible, but no later than the 15th business day of the month following the withholding. The Department of Labor will look at how quickly the employer is able to remit these funds to the plan. So let’s say an employee gets paid on the 15th and then gets paid on the 31st and the employee has elective deferrals taken out on both payrolls. If the employer combined those deferrals and contributed both of those into the plan by the fourth of the following month the above rule appears to have been met. But, the Department of Labor will have an issue with that, since they look at how quickly the contributions can be made. If you can get the payment for the paycheck on the 31st by the fourth of the next month, you should be able to do that for the 15th, as well.

You have to make sure you’re getting these payments in on time or you may face penalties and may have to make up lost earnings to your participants.