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.

These conditions include the requirement that the written plan must provide for the exchange, and the requirement that the employer and contract provider must enter into an agreement to exchange information necessary to administer the contract under section 403(b). Even exchanges occurring before Jan. 1, 2009, must satisfy these plan and information sharing agreement requirements as of that date, subject to a very limited grandfather rule, discussed below.

Hence, these new restrictions on exchanges could have a dramatic chilling effect on participants’ willingness and ability to move money prior to 2009.

The final regulations provide a very limited grandfather rule. Here, the new constraints on exchanges do not apply to Rev. Rul. 90-24 transfers made on or before Sept. 24, 2007.

Although the scope of this grandfather rule is unclear, it appears that section 403(b) contacts issued and funded with Rev. Rul. 90-24 transfers made on or before September 24 are not subject to the new written plan requirement or the new information sharing agreement requirement.

It appears that providers can administer these grandfathered contracts by relying on participant representations. It also appears that this grandfather treatment does not apply to existing orphan contracts, although owners of orphan contracts might be able to avail themselves of this treatment simply by exchanging the contracts for new 403(b) contracts in Rev. Rul. 90-24 transfers on or before Sept. 24, 2007.

For these reasons, it is critical that section 403(b) contract providers fully understand the important implications that the new written plan requirement and related rules have prior to the Jan. 1, 2009 general effective date of the final regulations.

This new requirement affects existing orphan contracts, contracts issued and funded with 90-24 transfers through Sept. 24, 2007, and contracts issued after Sept. 24, 2007 in Rev. Rul. 90-24 transfers subject to the new constraints on exchanges. The final regulations will force dramatic changes in the way providers administer section 403(b) contracts.

Mark E. Griffin, Esq., is a partner with the Washington, D.C. law firm of Davis & Harman, LLC. His e-mail address is .