IRS Moves On 403(b) Plans Concern AALU And ACLI
An effort by the Internal Revenue Service to consolidate and clarify the rules governing 403(b) annuities and accounts has drawn concern from the life industry that the changes could create burdens for employers and therefore reduce the availability of such plans.
At an IRS hearing on the proposed regulations, representatives of the life industry listed several areas of concern, including proposed changes dealing with the use of insurance contracts for funding “incidental death benefits” under section 403(b) plans.
Retirement plans governed by section 403(b) of the Internal Revenue Code are similar to the better known 401(k) plans but are designed for employees of nonprofit institutions such as charities, churches or public schools and universities. Regulations for the plans have been issued in the past through Revenue Rulings and private letter rulings, and the IRS said in its introduction to the proposed regulations that they were being offered as a means to bring the rules governing 403(b) plans more in line with those governing 401(k)s.
The proposed rules have raised some concerns for the industry, however, most notably in the use of life insurance in 403(b) plans. Life insurance contracts historically have been used to fund incidental death benefits for 403(b) plans, and while the proposed regulations would not prohibit continuing this practice, they do bar life policies from being used as annuities for 403(b) purposes.
In a letter to the IRS prior to the hearing, Lawrence Raymond, secretary of the Association for Advanced Life Underwriting, told the IRS the proposed rules have created “significant confusion about the extent to which separate life insurance contracts [as defined under Code section 7702] can be used to provide incidental death benefits.” At the hearing, he reiterated that the proposed regulations should not overwhelm the fact that incidental death benefits are and should be allowed in 403(b) arrangements just as they have been historically allowed in qualified plans. Although he acknowledged it was likely unintentional, Raymond said the proposed regulations would at best create confusion and at worst impose a barrier to implementation of incidental death benefits.
The possibility of the rules, even unintentionally, barring incidental death benefits in 403(b) plans also drew concern from the American Council of Life Insurers.