In July 2007, the IRS issued final regulations governing Section 403(b) plans (also known as tax sheltered annuities or TSAs). The last time the IRS issued comprehensive Section 403(b) regulations was in 1964. The final regulations impose several new requirements and fiduciary responsibilities on employers with 403(b) plans. While the bulk of the regulations won't take effect until January 1, 2009, there are some provisions that apply sooner.
For a free assessment of how the new regulations may affect your 403(b) plan Contact us, and we’ll prepare a free 401(k) plan proposal for your comparison.
The new rules may substantially increase the paperwork, cost of administration, and potential liabilities of sponsoring a 403(b) plan. Thus, non-profits will want to make sure their 403(b) plan conforms to the new regulations or even consider switching altogether to a 401(k).
The 403(b) is a retirement plan for non-profits only. However, since 1996, tax-exempt organizations, however, have been allowed to establish 401(k) plans. Although, the 401(k) can be used by both non-profit and for-profit institutions many non-profits only never even considered the 401(k) as an alternative when they set up their retirement plan.
The new regulations can make the 403(b) more burdensome and expensive to maintain than would be the case with some 401(k)s. Among the new 403(b) requirements are that the plan must be in writing and contains all the terms and conditions for eligibility, limitations, and benefits under the plan. The consequences of not meeting the new regulations can be severe since all 403(b) contracts purchased for an employee by an employer must be treated as a single contract. As a result, if a contract fails to satisfy certain Section 403(b) requirements, then generally not only that contract but also any other contract purchased for that individual by that employer would fail to be a contract that qualifies for tax-deferral.
It is possible for an employer to have a 401(k) that operates with employee contributions only, and has minimal administrative burdens at a low in cost. The 401(k) is a widely popular plan and typically comes bundled with:
Pre-approved prototype plans.
Good software and support materials.
Participant retirement investment education.
There are many different factors to consider when choosing a retirement plan for your organization. In some cases, more than one type of plan will meet your needs. Here are some key issues to consider:
Are you looking to maximize contributions for you and other highly compensated employees rather than for lower-compensated employees?
Do you want flexibility in making contributions each year?
Are the contributions to come solely from employees or will the employer match?
Is the plan to be used mainly as a recruiting tool to attract employees?
Do you want the plan to discourage employees from seeking employment elsewhere?
Will your plan allow loans or early withdrawals for hardships?
We would be glad to provide a free assessment of how the new regulations may affect your 403(b) plan, and to also prepare a free 401(k) plan proposal for your comparison when you contact us.
