On July 23, 2007, the IRS released its final regulations pertaining to 403(b) plans also known as 403(b) tax sheltered annuities. 403(b) plans are retirement plans offered by certain tax exempt organizations, such as school districts and charitable organizations. 403(b) plans are similar to traditional 401(k) plans, in which the employee and/or his or her employer can make contributions to the plan. For example, 403(b) contributions could be either elective contributions, that is salary reduction contributions, or non-elective contributions, such as employer match, discretionary or mandatory contributions on behalf of the employee. Contributions are invested in the particular investment choices offered by the employer under the 403(b) plan.
In the past, it was possible for an employee to transfer a portion of his or her 403(b) assets to any other investment that offered 403(b) plans. This option would enable an employee to participate in investments other than those offered under their employer’s 403(b) plan. However, it appears that once the final regulations become effective after December 31, 2008, this may no longer be the case. In general, the effective date for the new regulations is January 1, 2009 (with certain exceptions).
According to the new regulations, in-service, plan-to-plan 403(b) asset transfers are limited to situations where the participant is an employee or former employee of the employer sponsoring the receiving plan. It appears that a 403(b) to 403(b) exchange cannot be made unless the issuer of the new 403(b) plan has a written agreement in place with the employer. These in-service transfers and exchanges were called 90-24 transfers after Revenue Ruling 90-24 which permitted them. The 90-24 Revenue Ruling allows for transfers from one annuity to another annuity or custodial account or from one custodial account to another custodial account or annuity without tax consequences.
The Treasury issued guidance providing that exchanges pursuant to Revenue Ruling 90-24 must be completed by September 24, 2007. After September 24, 2007, transfers based on Revenue Ruling 90-24 will no longer be permitted. After that date, it appears that plans may permit exchanges from one investment product to another as long as the as the issuer of the new 403(b) plan or the investment company receiving the transferred amount has a written information-sharing agreement in place with the employer.
Please note that while the new IRS regulations restrict 90-24 exchanges after September 24, 2007, 403(b) plan participants can still rollover their 403(b) to an IRA when they have a distributable-triggering event such as reaching age 59 or by employment severance, where an employee no longer works for the employer. Likewise, 403(b) plans that are terminated may distribute assets with full rollover ability. It is also important to note that transfers not meeting the terms of the new regulations may be treated as a taxable distribution.
The final regulations incorporate many changes as a result of laws past over the last several decades such as ERISA, the Small Business Job Protection Act of 1996 (SBJPA), the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and most recently the Pension Protection Act of 2006 and are subject to future changes in the laws.
written by Bill Griffith, Jr., CFP.
