Non-Compliance to New 403(b) Regulations Could Result In Contributions Being Considered as Taxable Compensation

Bruce Craft

12/5/2008

If your church offers a 403(b) retirement plan to any of its employees, you should be aware of the new regulations that go into effect as of January 1, 2009.

As you may know a 403(b) plan is simply a 401(k) for non profit organizations (namely churches, schools and hospitals). They came into existence in 1958 and in 1964 the IRS issued regulations on compliance. These new regulations I'm writing about were first proposed in 2004 which means it has been over 40 years since the IRS has issued changes to these regulations. They were proposed in 2004 and finalized in 2007 and they go into effect on Jan.1, 2009 so many churches are rushing around trying to get into compliance by the end of the year.

These new regulations really have to do with accountability. The corporate world has been offering 401(k) plans and has had to abide by similar regulations for years and what the IRS is really trying to do with the new regulations is to make 403(b)'s and 401(k)'s look and feel similar.

I need to stress to you that although an extension to the deadline has been requested, there is no guarantee that it will be granted, so the deadline for getting into compliance is January 1st, 2009. In a recent meeting with representatives from AG financial Solutions we were concerned to learn that out of over 12,000 Assemblies of God churches in the U.S. there are only about 300 that they know for sure are in compliance. This is a serious issue and time is of the essence.

So What Are the New Regulations and What Do They Mean For Employers?

1. On January 1, 2009 each ministry will need to have their own written plan. I recently printed out the actual IRS revised plan and it is 131 pages long. When it comes to your written plan, there are certain requirements that must be addressed and looking at the actual size and wording in the IRS regulations, it will be quickly realized that most ministries don't have someone on staff that has the expertise to go in and figure out how a the plan needs to be written. Here are some of the plan requirements:

It must be a defined contribution plan and it must satisfy requirements of the IRS regulations in form and operation and it must contain the following:

A. Eligibility Definitions - This is the part of the plan that defines who on your staff is eligible to participate? (Full time, part time, administrative staff, etc.) You should note that a general best practice recommended is that all paid employees be allowed to participate, even if it is only on a voluntary basis, for reasons I won't go into in this article.

B. Contribution Benefits - This is the part of the plan that states whether there is an employer contribution. It answers questions such as; is there an employee match, is there a straight discretionary amount that the employer will contribute whether or not the employee contributes, will there be a certain time period before any contributions can be made (such as 90 days or after one year of employment). All these types of items need to be outlined in the written plan.

C. List of Contracts (for service providers) available - This is confusing to many people because some ministries have only been using MBA as their sole provider but some have allowed employees to contribute to multiple providers. In the plan you will need to list all the service providers that have been used after 2004 even if you decide to discontinue using them. In that case, they will need to be listed as former vendors that were offered under your plan. There are some reasons why you might not want to continue using multiple vendors which I'll talk about in a minute.

Once you have the written plan in place by Dec. 31 and if you have signed service agreements in place with your provider, it still doesn't relieve you of all responsibilities moving forward. You still need to be sure that your plan is compliant and that you are following the terms of the written plan. The employer will have to be the one that ensures the terms of the plan such as eligibility, contribution limits and the list of contracts are being followed.

Again, allowing all paid staff to participate is the easiest way to do this. If you're only allowing certain people to participate then you need to make sure that is the way the plan is followed. If you do make any changes, you would need to amend your written plan before you implement those changes.

2. The second issue regarding the new regulations is that there will be no more self-certification by employees. Under the current regulations the employee is the one who certified for themselves that they are eligible for hardship withdrawals or 403(b) loans. In today's economy there will probably be more of these hardship withdrawals requested. You will now have to be the one to sign the form which says that they have met one or more of the IRS definitions of a hardship and it will be your responsibility to obtain evidence of eligibility for the hardship. That may put you as the employer in an awkward position for several reasons I won't take time to go into in this article. Regarding loans, you're going to have to be the one who has to deal with non repayment and the related tax consequences for early withdrawal.

3. Information sharing agreements for transfers. Another regulation is that the employer must provide an information sharing agreement to MBA and/or other service providers if they're offering them, regarding items such as rollovers and transfers.

You should be aware that there is a difference in rollovers and transfers. A rollover is the same for every provider and is for purposes of distributions or withdrawals where there has been the occurrence of a "distributable event". A distributable event is when someone has reached the age of 591/2, has terminated employment, or there has been a death or disability take place. A Transfer is basically moving money from one 403(b) to another 403(b) and typically happens when someone changes employers and the new employer offers a different provider than the previous employer offered. For these rollovers and transfers to be in compliance with the new regulations, there needs to be an information sharing agreement in place.

4. Timely Remittance of deferrals. The new regulations are unclear in wording but the IRS has given an example of what it feels is timely by saying that "deferrals should be sent no later than 15 business days following the month in which these amounts would have been paid to the participant". In other words, whatever contributions are outlined in your plan, they need to be remitted in a timely manner. Most churches don't have a problem with this however, there are those ministries that will let contributions build up for 2 or 3 months and then send them in. The new regulations would apply to those ministries.

5. Under the new regulations most of the burden of administering these plans is shifting from the provider to the employer. Not only will there be more administrative responsibility with certifying hardship distributions and loans but the burden increases with multiple vendors.

Now might be a good time to talk about why you might want to move toward using a single vendor. There are some churches that have multiple vendors. They have given their employees a choice of 2, 3 or more service providers that the employee can choose to invest with.

Under the old regulations those ministries offering multiple providers only had the responsibility of having the employee tell them the amount they wanted to contribute and to which provider to send the contributions to. Under the new regulations the employer will now be the plan administrator for all the providers offered. So you will be in charge of Coordination of Information between all the providers whose plans you offer. You will also be in charge of hardship and loan administration for all the plans you offer. As you can imagine the burden is going to be heavy for ministries that continue offering multiple vendors. The trend is that many institutions are moving to one provider for simplicity and ease of administration.

If you decide to move to a single vendor, you then must also decide what you're going to do with the other providers. Are you going to freeze them and only offer one moving forward or continue to use them and offer multiple vendors? AG Financial tells us that the vast majority of district councils, churches and schools are moving to a single vendor.

In addition to those items already mentioned there are other items that must be included in a written plan such as distribution benefits, statutory (legal) contribution limits and distribution requirements in addition to the optional provisions, such as hardship distributions, loans, rollovers and transfers.

Consequences for Non-Compliance

So what if you're not in compliance? What happens then? You can rest assured that the IRS did not take all the time to issue these regulations without also assigning some consequences for non compliance. So here it is. "Failure to comply may include but is not limited to, immediate taxation of each participant's balance". That's a pretty big consequence.

These are questions that MBA can walk you through as a consultant. If you are just using MBA and their written plan and have a service agreement in place, they can take most of the administration responsibilities back to themselves regarding these issues.

I'm going to sound like a representative from AG Financial now, because they have been the provider that has really been on top of this and have educated me on the subject. MBA can walk you through all the issues mentioned as a consultant. And if you choose to use them as your sole provider they can take most of the administration responsibilities off of you and place them on to themselves. It is also my understanding that there is no charge for writing the plan document, issuing the service agreements and for administering your plan. If you don't adopt MBA's document you will need to make sure that your written plan includes all those items mentioned.

Many of you are familiar with Richard Hammar who is the Chief Legal Council for the Assemblies of God. He has reviewed these new 403(b) regulations and has issued two recommendations. He is highly recommending that ministries move to using only one provider going forward. In addition he is recommending that MBA be that sole provider. Frank Sommerville also has strongly recommended going with one provider and using a provider that is a denominational provider.

I encourage you to go to the AG Financial Website to learn more about this issue or to speak with your service provider(s) immediately in order to make sure you are in compliance with these new regulations by December 31st.

Have a blessed holiday season.