The final regulations under section 403(b) dramatically change the landscape for employers, providers and participants under section 403(b) plans.
Though generally effective beginning Jan. 1, 2009, the regulations have important implications even before then, regarding “section 403(b) contracts” (i.e., section 403(b)(1) annuity contracts and section 403(b)(7) custodial accounts).
Beginning Jan. 1, 2009, a section 403(b) contract must be maintained under a written plan. This plan must comply in both form and operation with the requirements of section 403(b).
Under this requirement, the responsibility for administering the contracts rests primarily with the employer. These responsibilities can be reallocated to contract providers, but not to participants, thereby putting an end to provider reliance on participant representations.
Bringing a section 403(b) contract that exists on Jan. 1, 2009 into compliance with the written plan requirement on that date will be problematic. This is especially so where the employer does not maintain a connection with the contract, e.g., by making salary reduction contributions to the contract.
Such “disconnected” contracts include (1) contracts funded with tax-transfers between section 403(b) contract under Rev. Rul. 90-24, and (2) so-called “orphan” contracts into which salary reduction contributions were being made in the past but no longer are being made.
Unfortunately, failure to establish the required nexus between contract and employer’s written plan by Jan. 1, 2009 could result in adverse tax consequences to the participant-owner as of that date. However, prior to that date, the contract may be exchanged for another section 403(b) contract that is provided under the plan or rolled over to another type of arrangement such as an individual retirement arrangement.
With respect to Rev. Rul. 90-24 transfers, the written plan requirement is reflected generally in new rules for “exchanges” between 403(b) contracts under the same employer’s plan. An exchange between 403(b) contracts is permitted only if certain conditions are satisfied.