Final 403(B0 Regs.-A Ramble Through the Preamble

Well, we finally have the final regulations under §403(b). Assuming no changes are made before the projected publication date of July 26th and based on a review of the Preamble, here are what appear to be the highlights, with a focus on elements that will affect employers and the marketplace most directly.

· The final regulations are not effective until 2009. This is surprising to anyone who contemplated the chaos that would result from a 2008 effective date. There are also transitional rules for collectively bargained plans (the earlier of the termination of existing CBAs or three years from publication of the final regulations) and plans of church-related organizations (2010). Plans that rely now on Rev. Rul. 90-83 can continue to do so until 2010.

· The written plan requirement has been left in the final regulations. Again, this is not surprising, but it is likely to continue the consternation felt by sponsors who have essentially treated their employees and payroll systems as marketplaces for annuity vendors. It should not, because the simple fact of creating a plan document has absolutely no effect on whether a plan is subject to ERISA or on the responsibilities of employers with §403(b) plans or arrangements.

· The final regulations help somewhat with the process of creating a written plan by allowing incorporation by reference of things like annuities. This makes clear that the employer can create a wraparound document that lists and incorporates by reference the terms of the investment vehicles available under the plan. They also explicitly authorize the employer, in the plan, to allocate responsibilities for administration and compliance matters to others. However, there is also a requirement that documents incorporated by reference not conflict and that the plan control over the incorporated documents; this should make it routine for the employer to request copies of all §403(b)-related documents and to instruct vendors that they must subordinate their documents to the terms of the plan.

· The final regulations continue the requirement that the §403(b) plan comply “in both form and operation” with §403(b). This emphasizes further the need for employers to get a better grip on their plans, and in particular the limitations on distributions that can cause a §403(b) plan to fail even though the employer has done nothing. It is precisely “nothing” that employers can no longer do.

· The emphasis on the §403(b)(5) rule continues in place, and is actually emphasized. This rule treats all contracts as a single contract, with the result that limitations like the annual deferral and annual contribution limits and the limitations on time of distribution, loans and hardships have to be set out in the wraparound document and have to be complied with on an aggregate, plan-wide basis. This is emphasized by the new requirement for like kind exchanges out of the plan that the plan and the recipient investment vehicle exchange data to coordinate distributions. The preamble also explicitly states that investment issuers will have to look to the employer for employment-related information, in effect subordinating the issuers to the employer in compliance matters.

· The anomaly for hardship distributions from custodial accounts has been finalized. This says that although employer contributions to annuities and retirement income accounts can be distributed on hardship, employer contributions to custodial accounts cannot.