§403(b) Plans: A New Universe
August 8, 2008

If you are a §501(c)(3) non-profit organization, the chances are that you maintain a §403(b) plan for the benefit of your employees. Under normal circumstances, the plan permits your employees to make pre-tax salary reduction contributions (sometimes called “elective deferrals”) and, perhaps, the organization matches some portion of the employee contributions or even adds its own contributions not tied to what the employees do. As is frequently the case, your organization may have tried to avoid status as an ERISA plan sponsor by limiting its involvement with the plan to merely acting as a conduit for employee contributions - withholding funds from employees' pay and transmitting the funds to the plan vendors (insurance companies, mutual funds, etc.). Your organization may have been dealing with a single vendor or you may be giving your employees a broad range of choices as to where their contributions can be invested.

Regardless of where on the spectrum your plan falls, the §403(b) regulatory universe has changed. After many years of pursuing its long-stated goal of causing §403(b) plans to more closely resemble §401(k) plans, the Internal Revenue Service, in July of 2007, issued final regulations governing §403(b) plans. While many of the basics regarding the operation of the plans have remained unchanged, much is different.

One of the principal new requirements is that any employer maintaining a §403(b) plan for its employees must adopt a written plan document by no later than December 31, 2008. If you are sending all of the contributions through to a single vendor, that vendor may be willing and able to supply you with a written plan document that will satisfy the extensive requirements set forth in the regulations. However, if your plan deals with two or more vendors, or if your vendor does not provide you with a document that meets your needs, it will be up to you to provide and thereafter maintain the plan document.

The Thomas & Libowitz Employee Benefits and Executive Compensation Group has developed a set of plan documents that will not only meet all of the requirements of the new regulations, but, as well, are flexible enough to be tailored to the needs of your organization. Further, our documents can be tailored both to those organizations that wish to continue to avoid ERISA plan status and to those organizations whose involvement with the plan is extensive enough that they have been willing to accept ERISA plan status and the fiduciary responsibilities that go with that status. (Actually, there are circumstances in which ERISA plan status is desirable.)

Fortunately for those non-profit employers that have attempted to avoid ERISA plan status by merely acting as a conduit for employee contributions, the new requirement for a written plan document will not, in and of itself, cause the plan to become subject to ERISA.

We would be more than happy to assist you in meeting your plan document requirements, and to help you in evaluating the extent to which your plan must change in order to meet the other requirements of the final regulations. Did you know, for example, that, under a principle known as “universal availability”, if any of your employees are permitted to make pre-tax contributions, that right must be extended (with certain limited exceptions) to all of your employees? However, in return for making elective contributions universally available, plans that do not provide for other types of employer contributions are completely exempted from any kind of discrimination testing. On the other hand, most §403(b) plans that provide for matching or other employer contributions must pass the same kind of non-discrimination testing that applies to §401(k) and other tax-qualified retirement plans.
We can be of help in making the transition to life under the final regulations. Please keep in mind, however, that all design decisions must be completed, and the written plan in place, no later than December 31, 2008.

If you have any questions, please contact:

Barry D. Berman, Esquire
bberman@tandllaw.com
(443) 927-2115

or

John R. Paliga, Esquire
jpaliga@tandllaw.com
(443) 927-2114