Tax News

CCH (cch.taxgroup.com) reports:

The IRS has issued final regulations under Code Sec. 403(b) and related provisions of Code Secs. 402(b), 402(g), 402A, and 414(c). The regulations update guidance on Code Sec. 403(b) contracts of public schools and tax-exempt organizations. They finalize proposed regulations (NPRM REG-155608-02, November 16, 2004). The regulations generally apply for tax years beginning on or after December 31, 2008.
Background
Retirement plans under Code Sec. 403(b) provide tax-favored treatment for public school employees, employees of Code Sec. 501(c)(3) tax-exempt organizations, and certain ministers. Funding arrangements can include insurance annuity contracts, custodial accounts holding only shares of mutual funds, and church retirement income accounts. Elective deferrals under these plans must be made universally available. Control group rules for tax-exempt entities apply.
CCH Comment. The existing regulations date from 1964. The final regulations outdate or supersede decades of rulings (see footnote 11 in the Preamble to the Treasury Decision for a complete list). Certain existing rules are retained such as the rules for determining when employees are performing services for a public school (Rev. Rul. 73-607, 1973-2 CB 145; Rev. Rul. 80-139, 1980-1 CB 88), and rules regarding the treatment of church entities and public schools for control group purposes (Notice 89-23, 1989-1 CB 564).
Final Regulations
The final regulations are a comprehensive update of the current regulations regarding the exclusion for contributions, contribution limits, nondiscrimination rules, distribution timing rules, taxation of distributions, funding and special rules for church plans. They require that a Code Sec. 403(b) contract satisfy the regulatory requirements both in form and operation. The final regulations provide rules under which tax-exempt entities are aggregated and treated as a single employer under Code Sec. 414(c).
The final regulations mostly track the proposed regulations, but the IRS has made modifications, particularly in the areas of most concern to commentators. The issues cited by the IRS for special attention include (1) the newly created written plan document requirements, (2) the elimination of previously allowable exclusions from the universal availability rules, (3) the elimination of previously allowable contract exchanges, and (4) requests to broaden the circumstances under which permissive aggregation is permitted under the controlled group rules.
Written Plan Documents
The final regulations retain the requirement under the proposed regulations that a Code Sec. 403(b) contract be issued pursuant to a written plan, which in both form and operation satisfies the requirements of Code Sec. 403(b) and the regulations. In response to concerns about the administrative burdens imposed by the written plan requirements, the final regulations clarify that the plan may allocate to the employer or another person the responsibility for performing administrative functions, including compliance functions with regard to Code Sec. 403(b), as long as the individual is identified who will be responsible for requirements that apply based on consolidated contracts issued to a participant. Also, the plan is permitted to incorporate by reference other documents for purposes of including all of the material provisions, including the insurance policy or custodial account which as result would become part of the plan. In response to concerns about the added cost to public schools of maintaining a written plan, the IRS intends to publish model plan provisions that may be used by public school employers.
CCH Comment. The written plan requirement brings the 403(b)
plan requirements closer to those that govern 401(k)
plans.
Contract Exchanges
Tax-free contract exchanges taking place outside of the plan have been permitted under Rev. Rul. 90-24, 1990-1 CB 97, as long as the successor contract included distribution restrictions that are the same or more stringent than the distribution restrictions in the contract that is being exchanged. This rule created complications, especially when a participant's benefits were held by numerous carriers. The proposed regulations would limit tax-free exchanges to situations in which the new contract is provided under the plan. In response to concerns that the proposed rules went too far in discouraging contract exchanges, the final regulations permit an exchange of one contract for another to constitute a mere change of investment within the same plan, if (1) the new distribution restrictions that are not less stringent than those imposed on the contract being exchanged, and (2) the employer enters into an agreement with the issuer of the other contract under which the employer and the issuer will from time to time in the future provide each other with certain information concerning the participant's employment as well as information that takes into account the participant's other plans. These rules do not apply to contracts issued before 60 days after the date of publication of the regulations in the Federal Register (assuming the exchange satisfies the pre-existing requirements). The IRS is authorized to issue guidance allowing exchanges in other cases in which the resulting contract has procedures that are reasonably designed to ensure compliance with requirements that depend on the participant's employment information or information that takes into account other Code Sec. 403(b) contracts or qualified plans.
CCH Comment. Contract exchanges outside the plan are not permitted for 401(k)
plans.
Universal Availability Rules.
Nondiscrimination rules apply to Code Sec. 403(b) plans and, historically, under Notice 89-23, 1989-1 CB 564, employers have been held to a good faith standard in satisfying these requirements. This standard will continue to apply to state and local public schools (and certain church entities) for purposes of determining controlled groups.
Certain previously allowable exclusions provided by Notice 89-23, 1989-1 CB 564, are not carried forward in the final regulations. A transition rule applies to 403(b)
plans that contain exclusions, under which the plan may continue the exclusions up until tax years beginning on or after January 1, 2010. The eligible exclusions include (1) employees who make a one-time election to participate in a governmental plan (Code Sec. 414(d)) instead of a 403(b)
plan, (2) professors who are providing services on a temporary basis to another school for up to one year and for whom 403(b)
plan contributions are being made at a rate no greater than the rate each such professor would receive under the 403(b)
plan of the original school, and (3) employees who are affiliated with a religious order and who have taken a vow of poverty where the religious order provides for the support of such employees in their retirement.
Tax-Exempt Entity Controlled Groups
Like the proposed regulations, the final regulations provide rules for determining controlled groups for entities that are tax-exempt. These rules are not limited to Code Sec. 403(b), but apply more broadly for purposes of determining when tax-exempt entities are treated as a single employer under Code Sec. 414(b), (c), (m) and (o). For example, these rules apply to plans maintained by a tax-exempt entity that are intended to be qualified under Code Sec. 401(a). For a Code Sec. 501(c)(3) employer that makes contributions to a Code Sec. 403(b) plan, the controlled group rules would be generally relevant for purposes of the nondiscrimination requirements, contribution limits, catch-up contributions, and minimum distributions. The proposed regulations provided that (subject to anti-abuse rules), tax-exempt organizations can choose to be aggregated for these purposes if they maintain a single plan covering one or more employees from each organization, and the organizations regularly coordinate their day-to-day exempt activities. In response to requests to broaden the permissive aggregation rules, the final regulations authorize the IRS to permit permissive aggregation under other circumstances as long as there are substantial business reasons for maintaining each entity in a separate trust, corporation, or other form, and under which common control treatment would be consistent with the anti-abuse standards in the regulations.
Dates and Transition Rules
The regulations generally apply for tax years beginning on or after December 31, 2008, and, because individuals will almost uniformly be on a calendar tax year, these regulations will generally apply on January 1, 2009. For a plan maintained pursuant to one or more collective bargaining agreements that were ratified and in effect as of the date of publication in the Federal Register, the regulations do not apply until the earlier of: (1) the date on which the last of such agreements terminates (determined without regard to extensions made after the date of publication in the Federal Register), or (2) three years after the date of publication in the Federal Register. For a plan maintained by a church-related organization for which the authority to amend the plan is held by a church convention, the regulations do not apply before the beginning of the first plan year following December 31, 2009. Other transition rules apply for particular provisions.
Treasury Department News Release, TDNR HP-501, 2007FED ¶46,558
T.D. 9340, 2007FED ¶47,051
Other References:
Code Sec. 101
CCH Reference - 2007FED ¶6502
Code Sec. 401
CCH Reference - 2007FED ¶17,723C
CCH Reference - 2007FED ¶17,925A
Code Sec. 402
CCH Reference - 2007FED ¶18,208
CCH Reference - 2007FED ¶18,210B
CCH Reference - 2007FED ¶18,217C
CCH Reference - 2007FED ¶18,220H
Code Sec. 402A
CCH Reference - 2007FED ¶18,230C
Code Sec. 403
CCH Reference - 2007FED ¶18,271
CCH Reference - 2007FED ¶18,276C
CCH Reference - 2007FED ¶18,277
CCH Reference - 2007FED ¶18,277AC
CCH Reference - 2007FED ¶18,277B
CCH Reference - 2007FED ¶18,278C
CCH Reference - 2007FED ¶18,278F
CCH Reference - 2007FED ¶18,278H
CCH Reference - 2007FED ¶18,278K
CCH Reference - 2007FED ¶18,278M
CCH Reference - 2007FED ¶18,278P
CCH Reference - 2007FED ¶18,278S
CCH Reference - 2007FED ¶18,278V
CCH Reference - 2007FED ¶18,279
CCH Reference - 2007FED ¶18,280
Code Sec. 414
CCH Reference - 2007FED ¶19,155B
CCH Reference - 2007FED ¶19,155C
Code Sec. 3405
CCH Reference - 2007FED ¶33,620A
Code Sec. 4974
CCH Reference - 2007FED ¶34,382A
Tax Research Consultant
CCH Reference - TRC RETIRE: 69,050
CCH Reference - TRC RETIRE: 69,100
CCH Reference - TRC RETIRE: 69,150
CCH Reference - TRC RETIRE: 69,200
CCH Reference - TRC RETIRE: 69,250