Proposed 403(b) Regulations - Bullets
Rev. 12/16/04, E-mail; Alert 2004-25

For the first time in more than 40 years, the IRS has proposed comprehensive regulations to update 403(b) plans. The new regulations would erase most of the differences between these plans and 401(k) plans. The IRS will be accepting public comments until February 15, 2005, and hopes to issue final regulations in time for the 2006 plan year.

403(b) become qualified plans - almost
The proposed regulations were issued in November 2004 – 40 years after the last 403(b) regulations. The proposals follow the trend of other recent guidance eliminating most of the differences between 403(b) plans and 401(k) and 457(b) plans. The final regulations are expected to be effective for years after 2005 and will supersede over 20 Revenue Rulings and Notices issued over the past 40 years concerning 403(b) plans.

The proposed regulations make a number of changes from the past rules and clarify many other issues. These items include:

• A requirement to have a plan document for 403(b) arrangements.
  
• The ability to have plan termination as a distributable event, if certain rules, that are similar to the 401(k) successor plan rules, are followed. For example, another 403(b) may not be established by the employer for 12 months after the 403(b)’s termination.
  
• The introduction of nondiscrimination rules for nonelective contributions similar to those that apply to profit-sharing plan, (there remains no ADP testing for 403(b) deferrals) .
  
• The introduction of a controlled group rule on certain 501(a) tax-exempt entities based on an 80% common control test which applies to directors or trustees rather than ownership .
  
• The coordination of the two types of catch-up contributions available to 403(b) participants is clarified. The 15-year of service catch-up will always apply first. To the extent that amount is used up for a year, the 414(v) catch-up amount may be taken in addition.
  
• Significant clarification of the application of the universal availability rules and some of the categories of excludable employees were eliminated.
  
• The application of the qualified plan timeframe for the timely deposit of employee contributions to 403(b) plans.
  
• A requirement that the 402(f) eligible rollover distribution notice be given when a participant is to receive a distribution, and that 20% mandatory withholding will apply on amounts eligible for rollover that are not directly rolled over.
  
• The JCWAA rule that employer contributions may be made for a terminated employee for up to five years was clarified.
  
• No benefit or right (other than matching contributions) may be conditioned on making 403(b) elective deferrals.
  
• The definition of a 403(b) annuity will no longer include a life insurance, endowment, accident, health, property, casualty or liability contract after February 15, 2004.
  
• The IRS is supposed to issue guidance shortly on the deferring of salary upon severance from employment.
  

The IRS also issued temporary regulation on elective deferrals that became effective immediately on Nov 16, 2004. The temporary regulation defines which elective deferrals are subject to FICA.

Comments and Public Hearing
Written or electronic comments on the proposed regulation may be submitted until February 14, 2005. The IRS will hold a public hearing in Washington, DC, on February 15, 2005.

It is anticipated that a representative of McKay Hochman will testify at the hearing.

Click here for the 403(b) proposed regulations and here for the temporary regulations.

Bill Grossman, QPA