Employee Benefit Consulting
403(b) Arrangements403(b) Arrangements
Assessing the changes Assessing the changes Planning for the futurePlanning for the future
Michigan Community College Michigan Community College Business Officers AssociationBusiness Officers Association
November 2, 2006
Aaron Prince (248) 375-7453Bruce Delbecq, CPA (248) 375-7276
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Summary of Session TopicsSummary of Session Topics
Review of Proposed 403(b) Regulations What is Required What is New
Implementation Considerations Documentation Vendor Management
Other Practices/Considerations Q&A and Feedback
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Review of Proposed 403(b) Regulations
Proposed 403(b) Regulations were issued late in 2004 – the first comprehensive guidance relating to 403(b) plans in over 40 years!
They may not be relied upon until finalized:
Initial target effective date of January 1, 2006
Final regulations are expected late in 2006 or very early 2007
IRS has since indicated will generally not be effective earlier than January 1, 2008
Most practitioners anticipate Final Regulations to be very similar to the Proposed Regulations
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Review of Proposed 403(b) Regulations
General “theme” of the Proposed Regulations is to bring 403(b) requirements closer to those of 401(k) and eligible 457(b) plans.
What does that mean?
Likely more employer involvement
Increased administrative responsibility for employers
Previously almost entirely placed on vendor(s)
Unclear as to what day-to-day changes will occur
Potentially less flexibility for participants
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Review of Proposed 403(b) Regulations What is Required?
Written Plan Document
Previously no requirement to have, or operate plan in accordance with, a plan document
Elimination of Incidental Life Insurance Benefits
After February 14, 2005 (90 days after publication of Proposed Regulations) no longer permitted as a plan component
Certain contracts issued prior to February 14, 2005 are grandfathered
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Review of Proposed 403(b) Regulations What is Required?
Universal Availability Rule
IRS is emphasizing compliance with this rule!
Provides that salary deferral contributions must be offered and publicized to all employees (meaningful notice must be given)
Exceptions:
Certain student employees
Employees eligible for a 401(k)/457(b) of employer
Employees normally working < 20 hours/week
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Review of Proposed 403(b) Regulations What is Required?
Universal Availability Rule (continued)
Exception for employees normally working < 20 hours per week is only valid if:
Reasonably expected that employee would work < 1,000 hours for first 12 month period; and
For subsequent years, employee worked < 1,000 hours
Employees need not enter the plan on their date of hire
Reasonable entry should suffice (e.g., monthly)
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Review of Proposed 403(b) Regulations What is New?
Written Plan Document Requirement
What constitutes a written document?
Must be satisfied in form and operation
Must administer plan in accordance with the terms of the written document
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Review of Proposed 403(b) Regulations What is New?
Roth 403(b)
First permitted after January 1, 2006
Plan may offer Roth contribution option (must still provide for pre-tax contributions to be made
Similar to Roth IRA, after-tax contributions made and tax-free distributions (if certain requirements met)
Additional guidance anticipated
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Review of Proposed 403(b) Regulations What is New?
Employers may now Transfer Plan Assets between 403(b) vendors
Timing of elective contribution deposits
Do not need employee authorization/consent
Employee initiated transfers permitted only among employer authorized contracts and agreements
Will still be okay to transfer to MPSERS to purchase service credit, if plan allows
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Review of Proposed 403(b) Regulations What is New? Plan Termination
Written plan document may allow for termination of the plan and distribution of assets to employees
Uncertain how investment penalties will be handled
Regulations require that “accumulated benefits” must be the same after transfer as before
Ordering of Catch-Up Contributions (traditional/Age 50)
Traditional Catch-Up utilized first
Important since cumulative contributions under the traditional catch-up are limited to $15,000
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Review of Proposed 403(b) Regulations What is New?
Employer non-elective contributions may be made to a 403(b) plan on behalf of a participant for up to 5 years after employment termination.
Equal to the lesser of:
i) employee’s last 12 months of compensation or
ii) annual dollar limit in effect for each year.
Changes to withdrawal restrictions on employer contributions
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Review of Proposed 403(b) Regulations What is New?
Compensation after severance - 2½ months – can make elective deferrals from this “post-severance compensation”
FICA regulations clarified the definition of a salary reduction agreement for FICA tax purposes – only payments under or to a 403(b) annuity made by reason of a salary reduction agreement are considered wages for FICA tax purposes
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Implementation Considerations
Most community colleges will be unwilling/unable to change the overall 403(b) vendor structure
ERISA considerations – by analogy
Colleges will likely take the following steps:
Prune VendorsAssess participant satisfaction with vendorsAssess participation levels with each vendor
currently in placePrune vendors - start now
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Implementation Considerations
Consider issues/opportunities related to new rules
Attempt to maintain one plan document
IRS has indicated it will publish model language (not model document). Probably in Spring of 2007
Worth waiting for – vendors will have trouble saying no to IRS model language
Invoke a comprehensive vendor agreement
Consider current solicitation policy and making any modifications
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Implementation ConsiderationsDocumentation
Aim for one plan document
No two documents will have the same provisions
Keep differences between vendors to a minimum to minimize errors and confusion
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Implementation ConsiderationsVendor Management
Spell out the responsibilities of the parties
Document actions that in the 401(k) world are the employer’s responsibility, but will be shifted, in whole or in part, to the vendor
Address how non-compliance will be handled
Areas where vendors will look for more employer involvement
Determining employee eligibility Ensuring timely forwarding of participant contributions Contribution limitations Approving vendor to vendor transfers Approval of distribution requests – termination, age 59½, hardship
QDRO’s
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Implementation ConsiderationsVendor Management
AREAS OF CONCERN
Performance/cost of investment products
Deferred sales charges
Quality and independence of investment education and investment advice
Stability of administrators/investment managers/annuity custodial account providers
Plan loans-repayment and default
Correction of mistakes
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Implementation ConsiderationsOther Practices/Considerations
Reassess eligible 457 plan management and administration in light of 403(b) changes
Deposit of salary deferred contributions – As soon as administratively feasible, but not later than 15 business days – the ERISA standard that Colleges should adhere to
Plan document and operational defects – the Employee Plans Compliance Resolution System (EPCRS)
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Plante & Moran, PLLCPlante & Moran, PLLCEmployee Benefits Consulting GroupEmployee Benefits Consulting Group
Thank you!
Aaron Prince [email protected] (248) 375-7453
Bruce Delbecq, CPA [email protected] (248) 375-7276
2601 Cambridge Court, Suite 500
Auburn Hills, MI 48326