Retirement Plans: Major Changes to the 403(b) Rules; How to Prepare

Section 403(b) of the
Internal Revenue Code is undergoing its most significant changes in decades. The
IRS has issued final regulations for retirement plans governed by Section
403(b) and maintained by nonprofit and tax-exempt organizations and public schools
for their employees’ benefit. The plans may be funded through annuity contracts
issued by an insurance company, custodial accounts invested solely in mutual
funds, and retirement income accounts.


The new regulations,
which will generally apply as of Jan. 1, 2009, are intended to provide more
guidance on Section 403(b) compliance. They also offer more flexibility,
introduce new restrictions, and attempt to make 403(b) programs operate more
like 401(k) plans, although certain key differences remain.


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What California Employers Need to Know

Employers should
understand the changes and modify their retirement plans to comply with the new
rules. To get ready for the upcoming changes, nonprofit employers should:


Choose providers
In response to the new rules’ more detailed paperwork
requirements, and as a way to reduce overall investment expenses, employers are
expected to offer fewer providers of retirement plans for employees to choose
from. By limiting choices, however, it becomes even more important for a
nonprofit employer to give the best possible retirement savings options.
Organizations should examine each provider’s investment choices, expenses, and services
to make the most informed choice.


Prepare for the
When selecting any 403(b) provider, an employer should obtain a cost
breakdown for each expense. Annuities typically carry the highest costs. A
403(b) annuity may include investment expenses, insurance and administrative
fees, charges for any special features, and penalty charges that may be
triggered if money is withdrawn within a certain time period.


Create written plan
The new regulations require that a 403(b) plan be maintained
under an employer’s written plan of retirement options. This document must
outline the policies that govern the retirement offerings and identify its
providers and the eligible investments. It must also provide information on
employees’ eligibility to participate in the 403(b) plan, contribution limits,
hardship withdrawals, loan requirements, and withdrawal procedures.


Revisit the
organization’s 403(b) program regularly.
After setting them up, employers
need to regularly monitor their 403(b) programs and costs to ensure continued
compliance. Neglecting to do this can lead to inadvertent errors; failing to
comply with 403(b) could result in IRS penalties. Establishing an in-house advisory
board responsible for creating procedures and overseeing the providers may be


Inform workers
about the new limits on transfers.
Nonprofit employees need to know that
when the new regulations take effect, their ability to invest their pretax
contributions beyond their own 403(b) investment will not be available.


Educate yourself
and your employees about the new rules.
As with any change, employers
naturally may feel stressed about educating employees and achieving necessary
compliance. To alleviate some of this, the IRS provides information and
guidance on the new regulations on its website, www.irs.gov.
Also, the California State Teachers’ Retirement System developed a website
called 403bCompare to give information on the 403(b) providers school districts
in the state use, which may also be helpful for nonprofit employers. You can
access the website at



When overhauling your organization’s 403(b) offerings, don’t
forget to encourage workers to participate. Employees who already have a 403(b)
plan should be told that the annual contribution ceiling was raised to $15,500
for 2007. Additionally, employees who are at least 50 years old can contribute
$5,000 more in 2007.


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