There are still a number of critical tax issues related to the 2007 403(b) regulations that need to be resolved. For example, the IRS needs to clean up the horrible mess created by the ambiguities of Revenue Procedure 2007-71, and it needs to come to terms with the fact that mutual fund custodial accounts should be able to be distributed upon plan termination. For the most part, however, answers to the remaining tax issues are being wrought through a transition processs -albeit sometimes painfully.
What is really turning out to be the gravaman of the 403(b) marketplace, the one laden with the most liability for plan sponsors and the one with the most intractable problems are those related to the application of ERISA Title I.
For many years, a large number of 403(b) plans assumed that they fell well within the ERISA safe harbor, which permits such plans to operate without regard to ERISA. Others, because of the individual nature of the annuity selections, never considered that they were covered by Tile I, but would have realized that they have always been covered if they took a serious look.
The new regs have complicated the ERISA matters by forcing more accountability upon 403b plan sponsors, which has resulted in some serious catfights between employers and vendors about who has responsibility for what. This has ultimately resulted in a large number of even safe harbor plans finding themselves in the throes of Title 1.
Title 1 ‘s most obvious problem is the 5500, because, concurrent with the rest of this mess, is the new requirement that 403(b) plans are now subject to the full 5500 rules which have always covered 401(a) plans.
But the story does not end with 5500. Here are some thoughts (by no means exhaustive, by the way) of the true difficulty of what a non-ERISA plan has to go through when it bites the bullet and accepts ERISA responsibilities:
-Corporate Action. Recognize, by formal corporate action, the “establishment of a plan” under ERISA Title 1.
–Vendor cooperation. The vendor needs to transition its relationship with its vendors, and resolve compliance responsibilities
–Spousal consent/beneficiary designations. Perhaps the most significant issue, is working through and now applying these rules properly.
–ERISA-ify the Document and Summary Plan Description.
–Investment classes. Many investment classes under non-ERISA custodial accounts aren’t available under ERISA.
–ERISA Compliance Co-ordination.
–Establishing Plan Governance Structure including:
-Claims and Appeals process.
–Investment Policy, geared toward the unique aspects of 403(b).
–Insurance. ERISA bondng and fiduciary insurance.
–Audit and Annual Report.
-Participant Notifications, statements and disclosures.
Its going to be a difficult and time consuming process.
Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.