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IRS Can Do More for 403(b) Community, Panel Says

The Employee Plans Subcommittee of the IRS Advisory Committee on Tax Exempt and Government Entities chose as its 2014-2015 project to reexamine the current state of the 403(b) community seven years after the issuance of the 403(b) final regulations. Specifically, the EP Subcommittee sought to identify the key issues making it hard for 403(b) plan sponsors to comply with the Internal Revenue Code. The subcommittee made recommendations in the following areas.

Universal Availability

The IRS should continue to work to expand educating the 403(b) community by improving its communication through its website, the 403(b) Fix-It Guide, newsletters about the existence and the application of the universal availability rule, and expanded outreach programs, including webinars and public presentations. The subcommittee also recommends that the IRS address certain particularly troublesome specific issues by expanding its education regarding issues such as:

  • In what manner receipt of other benefits can be conditioned on the employee making, or refraining from making, salary reduction contributions, if at all;
  • How the 20 hours per week and 1,000 hours per year rules work in “real life”;
  • The negative consequences that can ensue when an employer fails to provide the annual “effective opportunity” communication about a participant’s ability to begin or change regular 403(b) and Roth 403(b) elective deferrals;
  • The importance of the plan sponsor describing the terms of eligibility to participants;
  • That employees in certain categories cannot be excluded if they satisfy the 20 hour per week or 1,000 hours thresholds to be eligible to make salary reduction  contributions regardless of job titles or classifications; and
  • What happens when the job classification of a member of an excludable class changes in the middle of a year.

‘Orphan’ 403(b) Contracts

Unlike the majority of qualified plans, 403(b) participants held individual contracts which, before the issuance of the 403(b) final regulations, may have been placed with any number of vendors. If these participants terminated employment before 2009 and no additional contributions were made to the plan account after that time, based on IRS guidance, a plan sponsor need not list those contracts in its plan. The IRS should clarify the impact on the rest of the 403(b) plan if those “orphan” plans fail to comply with the Internal Revenue Code.

Minimizing Contract Leakage

Vendors face challenges when presented with withdrawal requests by participants. The subcommittee suggested that the IRS provide guidance to vendors that would allow them to take certain actions would help to preserve these retirement assets.

403(b) Plan Terminations

Given the many practical problems that are a by-product of the nature of the 403(b) structure, additional guidance would be helpful in addressing the more technical issues. In addition, the subcommittee said, the IRS could provide assistance by expanding online tools that are already available that cover termination issues.

EPCRS Improvements

The subcommittee recommends that the IRS update EPCRS to encourage its use of the by 403(b) plans. It added that possible improvements could include allowing common loan failures to be self-corrected, broadening the use of the Department of Labor online calculator, creating additional application schedules for 403(b) issues and discounted fees.