Client Alert

New IRS regulations require public schools and tax-exempt organizations that provide employees with retirement benefits under Code Section 403(b) to maintain a written plan document containing the material terms and conditions for eligibility, benefits and distributions. Prior to the new regulations, few affected employers have maintained any plan documentation other than the annuity contracts provided by an insurance company. This is no longer sufficient. The new plan document must be adopted no later than December 31, 2008. Without the required plan document, employees will be taxed on the retirement contribution from their employer.

Background
Code Section 403(b) applies to retirement contributions made by employees of public schools and employers that are tax-exempt under Section 501(c)(3). Section 403(b) also applies to contributions made for certain ministers. Under Section 403(b), contributions are excluded from gross income only if made to certain funding arrangements, such as annuity contracts issued by insurance companies or custodial accounts invested in mutual funds, complying with the requirements of Section 403(b).

Last summer, the IRS published new regulations under Code Section 403(b). The regulations provide comprehensive guidance for complying with Section 403(b), including the requirement that Section 403(b) plans be maintained pursuant to a written plan document. In Revenue Procedure 2007-71, the IRS published model plan language that may be used to satisfy the written document requirement.

Plan Document Requirement
The Section 403(b) regulations require plans to be maintained pursuant to a written plan document that specifies the material provisions of the plan, including eligibility, benefits, limitations, available investments and distributions. The plan may contain optional provisions that are permitted under Section 403(b), such as hardship withdrawals, loans, plan-to-plan transfers and acceptance of rollover contributions. A plan document will be treated as timely adopted to satisfy the requirements of the regulations if the plan is adopted no later than December 31, 2008, and is effective as of the applicable effective date under the regulations.

Plan vendors may provide the required documents to employers, but an employer having multiple vendors may find it necessary to obtain a plan document tailored to its particular situation, or may desire advice in completing or implementing the documents provided by a vendor. The Employee Benefits attorneys at Womble Carlyle are available to assist employers in complying with the plan document requirements of Section 403(b). 

Additional Information
If you have any questions regarding this client alert, please contact James Daniel, or you may contact the Womble Carlyle attorney with whom you usually work or one of Womble Carlyle's Employee Benefits Lawyers.