Tax News

CCH (cch.taxgroup.com) reports:

The Code Sec. 403(b) regulations (T.D. 9340, TAXDAY, 2007/07/23, I.1) aim to diminish the extent to which tax-sheltered annuities differ from other salary-reduction arrangements, such as 401(k)s
and 457s, an IRS official indicated on August 9. Robert Architect of the IRS's Tax Exempt and Government Entities Division discussed the new regulations on an ALI-ABA Webcast that also featured David Raish of Ropes & Gray LLP and Louis Mazawey of the Groom Law Group, Chartered.
The regulations spell out a number of requirements for the plan, Architect said: the plan must be in writing; both the form and the operation of the written plan must comply with the terms and conditions for eligibility, limitations and benefits; and the plan must contain particular language on direct rollovers, nontransferability, minimum distributions and incidental benefits. The plan can be more than one document. Architect added that the IRS is drafting a model plan, which he described as a "simple plan." He expects the model plan to be issued in the next two months.
The IRS and the Department of Labor (in DOL Field Advice Bulletin 2007-02) clarified that the written plan requirement would not automatically subject the plan to ERISA. However, Architect said that certain optional features of a 403(b)
plan could subject a plan to ERISA.
For the first time, the regulations define what a controlled group is for tax-exempt organizations, Architect stated, indicating that governments and steeple churches are excluded from these rules. The rules are based on an 80-percent director/trustee common control test. The rules allow permissive aggregation for tax-exempts with a common exempt purpose. Architect said that there is some "wiggle room" to apply the rules. Surprisingly, he noted, the IRS received few comments on this section of the regulations.
The regulations are not effective until tax years beginning after December 31, 2008. Taxpayers can choose to rely on the regulations in their entirety. There are delayed effective dates for collectively bargained plans, church plans that need action by a church convention and governmental plans that need legislative action, as well as for removal of certain groups under the universal availability rules.
The regulations allow post-severance elective deferrals of regular, sick and vacation pay. The regulations also allow nonelective employer contributions for five tax years after employment, plus the end of the year that employment ceases. Nonelective contributions are subject to the nondiscrimination rules under Reg. §1.401(a)(4) that apply to former employees who were highly compensated employees. The nonelective contributions must stop upon the employee's death, Architect pointed out. He noted that Social Security taxes apply to elective deferrals but not to nonelective deferrals, so it was important to distinguish them.
While elective contributions are subject to a simple nondiscrimination test of universal availability, nonelective contributions are subject to more a stringent test under Code Secs. 401(a)(4) and 401(m)
similar to the one for qualified plans. These rules do not apply to a governmental plan.
A Code Sec. 403(b)(9) account maintained by a church must be governed by a plan that identifies it as a retirement income account. An exclusive benefit rule requires that account assets be maintained for participants. If the account is part of a trust arrangement, Architect said that a new rule grants the trust tax-exempt status. This was an unclear area, so the new rule should be helpful, he said.
By Brant Goldwyn, CCH News Staff