FINAL 403(b) REGULATIONS ISSUED BY IRS

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1 ADMINISTRATOR LIBRARY SERIES FINAL 403(b) REGULATIONS ISSUED BY IRS FOR ADMINISTRATOR USE ONLY. NOT FOR DISTRIBUTION TO EMPLOYEES. OVERVIEW In July 2007, the IRS finalized the regulations under Section 403(b) of the Internal Revenue Code ( Code ) that they had proposed in At the same time, the Department of Labor issued a Field Assistance Bulletin (FAB) addressing how the new regulations might affect the ERISA exemption of certain salary-reduction-only 403(b) tax-deferred annuity (TDA) plans. EFFECTIVE DATES: The new final regulations amend the original regulations that were issued in 1964 and generally will be effective on January 1, 2009 (exceptions are described below). Until then, taxpayers may continue to comply with current law and IRS guidance or may voluntarily choose to apply the new regulations as long as they are applied in a consistent and reasonable manner. This Administrator Library Series Publication describes the potential effects of this IRS and DOL guidance on 403(b) retirement and tax-deferred annuity (TDA) plans. It is the first in a series of communications that will be published by TIAA-CREF in the next several months as our understanding of the regulations continues to evolve. Because TIAA-CREF cannot provide legal advice, plan sponsors should consult with their own legal counsel to determine the impact of these regulations on their individual plan designs. issued in They will lessen some of the differences between the rules that apply to 403(b) plans and those that apply to 401(k) plans by: WHAT WILL CHANGE The new regulations are similar in most respects to the proposed 403(b) regulations Imposing a written plan document requirement on all 403(b) plans including non-erisa plans. Generally limiting direct transfers from all 403(b) accounts to fund sponsors that agree to share information with the plan sponsor. Requiring employer-funded 403(b) retirement plans to apply the statutory nondiscrimination requirements, including new controlled group rules. MMD-6555 (8/07)

2 Requiring a triggering event prior to all in-service distributions from 403(b) plans, including distributions of employer contributions in annuity contracts. WHAT WILL REMAIN THE SAME Certain unique characteristics of 403(b) plans will remain even after the new regulations go into effect: 403(b) plans will continue to be available only to 501(c)(3) organizations, state colleges and universities and public schools. Unlike 401(k) plans, which are subject to a wide range of nondiscrimination tests, salary reduction 403(b) tax-deferred annuity plans ( TDA plans ) will continue to be exempt from the ADP test. TDA plans will continue to be subject only to the universal availability rule. The 15-year rule will continue to permit long-service employees at qualifying institutions to make special catch-up contributions. Employers will continue to be able to make contributions for former employees for up to five years after separation from employment. HOW TIAA-CREF HELPS: In spite of the new regulations, most 403(b) plans that have been operating in compliance with guidance provided by TIAA-CREF are not likely to be required to make major changes in the design of their retirement and tax-deferred annuity plans. THE DETAILS Here are some of the more important changes made by the final regulations and the implications of these changes for various types of 403(b) plans funded with TIAA-CREF contracts. You will also find indications of how the final regulations differ from the proposed regulations as well as where the new regulations have required us to modify our prior guidance. WRITTEN PLAN REQUIREMENTS Like the proposed regulations, the final regulations require 403(b) plans to have a written plan, with no exemption for governmental, church, or non-erisa TDA plans. The final regulations provide that if an employer fails to have a written plan by January 1, 2009, any annuity contract or custodial account (collectively referred to as 403(b) contracts ) purchased by the employer will not qualify as a 403(b) contract and contributions will be fully taxable. Plan documents will have to include basic plan provisions covering plan eligibility and benefits (including the timing and form of distributions available), applicable limitations and a list of the contracts offered under the plan. PLAN DOCUMENT VS. ANNUITY CONTRACT: The final regulations permit written plans to incorporate other documents (such as annuity contracts and custodial agreements) by reference. But in the case of a conflict between the terms of the plan and the 403(b) contract, the terms of the plan must control. Since the relationship between TIAA-CREF and plan participants is governed by the terms of the annuity contract or certificate, benefits will be determined by the terms of the contract or certificate. It is therefore, FINAL 403(b) REGULATIONS ISSUED BY IRS 2

3 essential that plan sponsors ensure that there is no conflict between the terms of the written plan and the terms of the 403(b) contracts used as funding vehicles. HOW TIAA-CREF HELPS: While the regulations do not mandate that this written plan requirement be satisfied in a single document, they do say that it is expected that a single plan document will be adopted for any program with multiple investment providers. TIAA-CREF currently provides specimen 403(b) Plan documents for those plans that are subject to ERISA. These specimen plan documents will be amended prior to 2009 to reflect the provisions of TIAA-CREF annuity contracts and the regulatory requirements. But they will not be amended to reflect the provisions of other financial service firms contracts. So plans with multiple vendors will need to work with all of the vendors to ensure that the plan document accurately reflects the provisions of all the 403(b) contracts used to fund their plans. Further, as TIAA-CREF cannot provide legal advice, plan sponsors will need to have these specimen plans reviewed by their own legal counsel to ensure that they meet these new regulatory requirements. EXEMPTION FROM ERISA FOR SALARY REDUCTION 403(b) PLANS DOL GUIDANCE: There have been concerns that having a plan document might have the effect of making certain previously exempt tax-deferred annuity (TDA) plans subject to Title I of ERISA, since qualifying for the TDA exemption from ERISA requires that employer involvement in the operation of the plan be limited. But according to Field Assistance Bulletin , issued by the Department of Labor immediately following the release of the final 403(b) regulations, TDA plans can still be exempt from ERISA even though they must now satisfy written plan requirements, if the following conditions are met: Participation of employees in the plan is completely voluntary. All rights under the annuity contract or custodial account are enforceable solely by the employee or beneficiary of such employee. Involvement of the employer is limited to certain optional specified activities. The employer receives no direct or indirect consideration or compensation, other than reimbursement of expenses. According to the FAB, compliance with these safe harbor requirements will be determined on a case-by-case basis. In administering a TDA plan, however, the employer cannot make (or have responsibility for) discretionary determinations (such as determining hardship distributions) and still retain the plan s non-erisa status. IRS MODEL PLAN DOCUMENTS FOR PUBLIC SCHOOLS: The IRS has indicated that it will publish model plan provisions for public schools to adopt prior to the 2009 effective date of the regulations. It is not expected that they will be issuing model provisions for other 403(b) plan types (such as employer-funded 403(b) retirement plans subject to ERISA). Nor is the IRS expected to have a determination letter program for 403(b) plans in the near future. In the meantime, if a plan wants to seek guidance on plan issues, it will have to request a private letter ruling from the IRS. FINAL 403(b) REGULATIONS ISSUED BY IRS 3

4 DIRECT TRANSFERS AND EXCHANGES Previously, under IRS Revenue Rule 90-24, nontaxable direct transfers between 403(b) contracts and custodial accounts were permitted so long as the successor contract or custodial account included distribution restrictions that were the same as or more stringent than the distribution restrictions in the contract or account that was being exchanged. The contract or account to which the transfer was made did not have to be authorized by the plan. The final regulations have made significant changes in the rules governing how a 403(b) contract or custodial account can be exchanged for another 403(b) annuity contract or custodial account within the same plan or directly transferred to a contract or account under another plan. The rules under the final regulations are substantially different from the rules contained in the proposed regulations. CONTRACT EXCHANGES: Transfers between annuity contracts and custodial accounts within a 403(b) plan will only be permitted under the final regulations if: The plan documents provide for the transfers; The contract or account to which the transfer is being made imposes distribution restrictions at least as strict as those imposed by the old contract or account; The benefit payable to the participant or beneficiary immediately following the transfer is at least equal to the benefit prior to the transfer; and The transfer is made to a fund vendor that has an information-sharing agreement with the employer. PLAN-TO-PLAN TRANSFERS: Under the proposed regulations, transfers between plans would have been permitted only if the individual was a current employee of the institution sponsoring the receiving plan. Under the final regulations, plan-to-plan transfers are permitted for both current and former employees, provided certain conditions are satisfied: Both the transferring and receiving plans provide for transfers, The participant or beneficiary s accumulated benefit immediately after the transfer at least equals the accumulated benefit immediately before the transfer, and Distribution restrictions after the transfer are at least as stringent as immediately prior to the transfer. Because neither a contract exchange nor a plan-to-plan transfer meeting the regulatory requirements is treated as a distribution, they may be made before severance from employment or another triggering event. TRANSFERS TO/FROM NON-403(b) PLANS: The final regulations make it clear that neither a qualified plan nor an eligible governmental 457(b) plan may transfer assets to a 403(b) plan, unless done by direct rollover. In addition, a 403(b) contract may not be exchanged for an annuity contract that is not a 403(b) contract. PURCHASE OF SERVICE CREDIT: The regulations permit a 403(b) plan to provide for the transfer of its assets to a qualified defined benefit governmental plan to purchase service credits under the plan. EFFECTIVE DATE: Direct transfers that comply with the prior IRS guidance under Revenue Rule are expressly permitted by the final regulations for 60 days after FINAL 403(b) REGULATIONS ISSUED BY IRS 4

5 publication in the Federal Register (i.e., until September 24, 2007). While it is not entirely clear what rules are to apply thereafter until the January 1, 2009 effective date of the final regulations, it appears that the new exchange rules that will require information sharing between the employer and plan vendors will apply. NONDISCRIMINATION TESTING For the most part, 403(b) retirement plans are currently subject to the same statutory nondiscrimination requirements as 401(a) retirement plans with three major exceptions: Employer-matching and employee after-tax contributions to voluntary contributory 403(b) plans are subject to the matching (ACP) test. But, unlike 401(k) plans, the elective deferral contributions to 403(b) plans are not subject to the average deferral percentage (ADP) test which compares the average elective deferrals made by nonhighly compensated employees with the average made by highly compensated employees. This rule is unchanged by the new regulations. Currently, under a special Notice issued by the IRS in 1989 for 403(b) plans (Notice 89-23), noncontributory 403(b) plans that meet one of the disparity safe harbor tests under the Notice are exempt from the statutory nondiscrimination requirements. In addition, Notice permits 403(b) plans to use a reasonable good faith interpretation of the nondiscrimination testing requirements until final guidance for 403(b) plans was issued. The new regulations eliminate the safe harbor alternatives, as well as good-faith testing standards for plan years beginning after December 31, Salary-reduction-only 403(b) TDA plans are exempt from the statutory nondiscrimination requirements that apply to 401(k) plans (ADP and coverage test). Participation in the 403(b) TDA plan, however, must generally be made universally available to any employee willing to contribute at least $200 a year to the plan. Certain categories of employees can be excluded from participating in the plan under the Code. In addition, Notice included other excludable categories that are no longer available under the new regulations. Other changes in nondiscrimination rules included in the final regulations relate to the identity of the employer under the controlled-group rules, the categories of employees that are excludable from the testing population, and the definition of part-time employees. None of these changes will affect nondiscrimination testing in plan years beginning before January 1, REPEAL OF NOTICE 89-23: Since the final regulations repeal Notice 89-23, 403(b) plans that currently rely on a reasonable interpretation of the nondiscrimination requirements that is not consistent with the IRS guidance for qualified plans and plans that rely on one of the Notice safe harbors will need to be tested under the general nondiscrimination requirements. For example, an age-graded voluntary contributory 403(b) plan will need to test each grade for compliance with the nondiscrimination requirements under IRC Section 401(a)(4) beginning in UNIVERSAL AVAILABILITY: Salary reduction 403(b) plans are generally exempt from the nondiscrimination requirements that apply to 401(k) plans. Under the universal availability requirement that applies to 403(b) salary reduction (TDA) plans, however, all employees must be permitted to make elective deferrals (of $200 or more), unless they are in a category FINAL 403(b) REGULATIONS ISSUED BY IRS 5

6 of employees that the Code permits to be excluded. The proposed and final regulations generally provide that this universal availability requirement applies separately to each common law entity, i.e., to each section 501(c)(3) organization, or, in the case of a plan that covers the employees of more than one state entity, to each entity that is not part of a common payroll. For universal availability, the proposed and final regulations allow an employer that has historically treated one or more of its various geographically distinct units as separate for employee benefit purposes to treat each unit as a separate organization if the unit is operated independently on a day-to-day basis. This separate treatment will not be available for the nondiscrimination testing applicable to 403(b) retirement plans if the employers are part of the same controlled group. EXCLUDABLE EMPLOYEES: The universal availability rule only permits certain categories of employees to be excluded from participating in the plan. For salary reduction plans, the categories of employees who are excludable from the plan under the Code include those who are: Eligible for a governmental 457(b) plan; Eligible for a 401(k) or another 403(b) plan of the employer; Nonresident aliens; Student employees; or Part-timers who normally work fewer than 20 hours per week. Notice included other excludable classes: Employees who make a one-time election to participate in a governmental plan instead of a section 403(b) plan; Union employees; Visiting professors; and Employees affiliated with a religious order who have taken a vow of poverty. The final regulations generally do not include these additional excludible class rules but do, however, provide certain relief for visiting professors and individuals who have taken a vow of poverty. And there are delayed effective date rules for the provisions eliminating the exclusions for union employees and governmental plans. CONTROLLED GROUP RULES FOR TAX-EXEMPT ENTITIES The proposed and final regulations include controlled group rules for tax-exempt entities that will apply equally to 403(b) plans, 401(a) qualified plans and eligible 457(b) plans. Under these rules, the employer includes not only the organization whose employees participate in the 403(b) plan, but also any other exempt organization that is under common control with such organization, based on 80% of the directors or trustees being either representatives of, or directly or indirectly controlled by, an exempt organization. These rules do not apply to governmental or church employers. The final regulations provide that, until further guidance is issued, public schools and churches can continue to rely on the rules in Notice for determining the controlled group. For section 403(b) plans, these rules would be generally relevant for purposes of the nondiscrimination requirements, as well as the section 415 contribution limitations, the 15-year catch-up limits, and the section 401(a)(9) minimum distributions rules. A plan that did not test for nondiscrimination compliance taking these controlled group rules into account will need to be retested on a controlled group basis and reviewed FINAL 403(b) REGULATIONS ISSUED BY IRS 6

7 for possible plan redesign before the effective date of the final regulations. Previously, we had relied on the reasonable good faith testing standard under Notice to separately test the plans of organizations that would be affected by this rule if they operated independently. In addition to this required aggregation, the proposed and final regulations also provide a permissive aggregation rule that allows exempt organizations that maintain a single plan covering employees from each organization to treat themselves as under common control if each of the organizations regularly coordinates its day-to-day activities with that of the others. WITHDRAWAL RESTRICTIONS Currently, under the Code, most amounts in 403(b) plans may not be paid to a participant until the participant has had a triggering event, such as disability, severance from employment or the participant reaching age 59½. These statutory withdrawal restrictions do not, however, apply to employer contributions in a 403(b)(1) annuity contract. Under the proposed and final regulations, employer contributions to a 403(b) annuity will also be subject to withdrawal restrictions, but only for annuity contracts issued after December 31, However, the final regulations also provide that a 403(b) plan can be amended prior to January 1, 2009, to comply with the new distribution restriction without it being a violation of the anti-cutback rule under ERISA. And only salary reduction contributions (not earnings) can be distributed on account of hardship under the final regulations. The final regulations also retain the grandfather rule that exempts pre (b) accumulations from the withdrawal restrictions. They also clarify that after-tax employee contributions are not subject to withdrawal restrictions. PLAN AMENDMENTS REQUIRED: Plans that currently permit unrestricted in-service distributions (lump-sum or annuitization) of employer contributions will have to be amended to reflect the new withdrawal restrictions for annuity contracts issued after This regulation will also require amendment of plans that permit in-service distribution of employer contributions to 403(b)(1) annuity contracts for hardship. CONTRIBUTION LIMITS The regulations do not change contributions limits for 403(b) plans, but they do clarify the application of various limits. Both the proposed and final regulations contain guidance on the treatment of contributions in excess of the 415 limit, and the ordering rules for individuals who are eligible for both Special 15-Year Catch-Up contributions and Age 50 Catch-Up contributions. Under the ordering rule, if a participant who is eligible for both catch-ups contributes more than the general limit but less the maximum amount permitted, then the amount contributed in excess of the general limit is counted first against his or her $15,000 lifetime limit under the 15-year rule. 15-YEAR RULE: Employees of a qualified organization who have at least 15 years of service with the organization purchasing the 403(b) contract may be entitled to a special section 402(g) catch-up. Under the 15-year catch-up, if an employee s elective deferrals in prior years were less than the 402(g) limit, he or she may be able to make deferrals of up to $3,000 over the 402(g) limit for the current year, subject to a lifetime limit of $15,000. FINAL 403(b) REGULATIONS ISSUED BY IRS 7

8 For purposes of the 15-year rule, qualified organizations include: schools, hospitals, health and welfare service agencies (including a home health service agency), or church-related organizations. The regulations leave these rules basically intact. The proposed regulations defined a health and welfare service agency as an organization whose primary activity is: to provide medical care (such as a hospice), or to prevent cruelty to individuals or animals, or to provide substantial personal services to the needy. The final regulations expand this definition of health and welfare service agency to include agencies that provide: Adoption services, Home health services, Assistance to individuals with substance abuse problems, or Help to the disabled. HOW TIAA-CREF HELPS: Generally, these regulations are consistent with the guidance that we have provided on these issues. Plans that are being operated in conformance with previous guidance from TIAA-CREF with regard to excess contributions and the ordering rules should not need to make any changes. PLAN TERMINATIONS Both the proposed and final regulations permit a 403(b) plan to terminate and distribute assets, if the employer does not establish another 403(b) plan within 12 months. Previously, there was no statutory basis for 403(b) plan termination and plan termination did not constitute a triggering event that would permit distribution to participants. TIMING OF CONTRIBUTION TRANSMITTALS The new regulations require that plan sponsors transmit all contributions to 403(b) plans to the insurance company or other carrier as soon as is administratively reasonable. The regulations provide that transferring elective deferrals within 15 business days following the month in which these amounts would otherwise have been paid to the participant will be treated as reasonable. For plans subject to ERISA, this will not require any changes since Department of Labor (DOL) regulations already require all elective deferrals to be remitted by the earlier of: 15 business days following the month in which the amount was withheld from the employee s pay, or the earliest date on which it is administratively feasible to remit. Institutions with plans that are not subject to ERISA and that currently take longer to remit employee contributions will have to conform to the new timing rule of the final regulations. FINAL 403(b) REGULATIONS ISSUED BY IRS 8

9 PLAN FUNDING Only funding vehicles such as an annuity contract, a 403(b)(7) custodial account or a 403(b)(9) church retirement income account are permitted in a 403(b) plan. The proposed and final regulations provide that a life insurance contract, an endowment contract, a heath or accident insurance contract, or a property, casualty, or liability insurance contract are not permitted investments. The regulations include a special grandfather rule for life insurance contracts issued before September 24, Prior to this regulation, incidental life insurance could be purchased under a 403(b) plan. Incidental was generally interpreted as permitting up to 25% of 403(b) plan contributions to be used for the purchase of term insurance. CONTRIBUTIONS FOR FORMER EMPLOYEES The proposed and final regulations confirm that a plan may continue making nonelective employer contributions for up to five years for a former employee, up to the lesser of the dollar amount in section 415(c) or the former employee's annual includible compensation during his or her most recent one-year period of service. This rule will have limited application for tax-exempt employers because contributions for former employees will be subject to separate nondiscrimination testing. This will be more useful to governmental employers as retirement plans of governmental employers are not subject to nondiscrimination testing. The 403(b) regulations do not address whether salary reduction contributions may be made for a former employee if the contribution is with respect to compensation that is paid after severance from employment. The IRS issued separate guidance on this issue under section 415 with respect to not only section 403(b) plans, but also section 401(k) and 457(b) plans. The final 415 regulations generally provide that amounts received after severance from employment are not considered to be compensation for purposes of section 415, but provide exceptions for certain payments made within the later of 2½ months after severance from employment or the end of the plan's limitation year (generally the calendar year) in which the severance occurs. NONFORFEITABLILITY REQUIREMENT Section 403(b)(1)(C) requires that a 403(b) contract be nonforfeitable. The proposed and final regulations clarify that if contributions to a 403(b) plan are not vested when made, then the contract is treated as a contract to which section 403(c) applies. Section 403(c) governs the taxability of certain nonqualified annuities. Under the regulations, the contract will be treated as a section 403(b) contract on the date on which the employee's interest in that contract becomes vested. It will not be taxable under 403(c) provided the contract at all times satisfied all 403(b) rules other than the nonforfeitability requirement. If a participant s interest is partially nonforfeitable, then the portion that is nonforfeitable and the portion that is forfeitable will be bifurcated for this purpose. The regulations require that each contribution under the contract that is subject to a different vesting schedule be maintained in a separate account. Contributions subject to delayed vesting will be counted for the 415 limit on contributions in the year for which they are made whether or not they are vested. FINAL 403(b) REGULATIONS ISSUED BY IRS 9

10 PLAN ADMINISTRATOR CHECKLIST: NEXT STEPS TO SATISFYING THE FINAL 403(b) REGULATIONS Institutions will need a game plan to achieve compliance with the final 403(b) regulations by the beginning of You should consider taking the following steps: 1. WRITTEN PLAN AND CONTRACTS: If you already have a plan document, review it to determine if it is complete and up-to-date and satisfies all the new regulatory requirements. You should also review the underlying 403(b) annuity contracts and custodial agreements to determine if they are consistent with the underlying written plan. If inconsistencies are identified, the plan terms must be conformed to the contracts. The regulations provide that in the event of inconsistency, the plan terms will control. In addition, if life insurance is currently an investment option, it should be eliminated. If you don t have a plan document, you should identify all current contracts, custodial accounts, plan descriptions, enrollment forms, distribution forms, service agreements, etc. to determine what the plan is. Consider whether these documents satisfy the written plan requirement in the final regulations or if something more is needed. While the final regulations provide that the written plan may incorporate other documents by reference, such as annuity contracts and custodial agreements, they also state that it is expected that a single document will be adopted for any program involving multiple investment providers. 2. NONDISCRIMINATION REQUIREMENTS: As the reasonable good faith testing standard and safe harbors of Notice will no longer be available beginning in 2009, if your plan has been relying on either of these options, you should review the plan design to determine if it will satisfy the statutory and regulatory requirements as they currently apply to qualified plans. Furthermore, if the plan has been relying on the expanded categories of excludable employees permitted by Notice to satisfy universal availability requirements, changes will be required. Also, if your organization is part of a controlled group, the new controlled group rules should be considered when applying the nondiscrimination requirements. 3. ACHIEVING OPERATIONAL COMPLIANCE: Employers will need to determine what they need to do to ensure operational compliance. How will the responsibility for administering loans, hardships, and distributions, etc. be allocated? The final regulations make it clear that it will be inappropriate for the employer to allocate this responsibility to participants as they lack the necessary expertise and objectivity. The final regulations also make it clear that the plan document should coordinate the responsibilities of the employer and the financial institutions issuing the contracts under the plan. 4. CONTRACT EXCHANGES AND PLAN-TO-PLAN TRANSFERS: With the effective revocation of Revenue Ruling 90-24, direct transfer among 403(b) contracts will generally be limited to those vendors that enter into an information sharing agreement with the employer. Transfer to unauthorized funding vehicles will no longer be permitted after September 24, It appears that the regulations will require you to enter into information sharing agreements with the vendors that you offer under your 403(b) plan by January 1, FINAL 403(b) REGULATIONS ISSUED BY IRS 10

11 QUESTIONS AND ANSWERS Q. What is the intent of the final 403(b) regulations? A. The purpose of the regulations is to update the current 403(b) regulations under section 403(b) to delete provisions that no longer have legal effect due to changes in law, to incorporate a number of items of interpretive guidance that have been issued under section 403(b) since the 1964 regulations, and generally to reflect the numerous legal changes that have been made in section 403(b). A major effect of these regulations will be to reduce the differences between the rules governing 403(b) plans and those governing other tax-favored employer-based retirement plans, including arrangements that include salary reduction contributions, i.e., section 401(k) plans and section 457(b) plans for state and local governmental entities. Q. How do the new 403(b) regulations coordinate with previous legislation? A. The regulations are the first comprehensive section 403(b) regulations since The regulations incorporate numerous changes to the arrangements, including changes in the Employee Retirement Income Security Act of 1974 (ERISA), the Tax Reform Act of 1986, the Small Business Job Protection Act of 1996 (SBJPA), the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Pension Protection Act of 2006 (PPA). Q. What happens if my institution s plan does not comply with the final 403(b) regulations? A. The final regulations address the effects of a failure to satisfy the requirements of 403(b) and the regulations: Contract Failure All contracts purchased for an employee are to be treated as a single contract for purposes of 403(b). If any contract fails to satisfy any of the 403(b) requirements, then all contracts purchased for that individual will fail to qualify for tax deferral under Section 403(b). Most operational failures solely within a single contract, for example, contribution limits, distributions, etc., will not adversely affect other participants but will generally disqualify all contracts of the affected participant provided under the 403(b) plan. Plan Failure All contracts issued under an employer s plan will be disqualified if the employer is not an eligible employer, if there is no written plan or if the nondiscrimination rules are not satisfied. Separate Bookkeeping for Excess Contributions and Vesting Contributions in excess of the 415 limit will not disqualify the entire contract provided the issuer maintains separate bookkeeping accounts for the portion that exceeds the limit. Separate bookkeeping is also required for each type of contribution that is subject to a different vesting schedule. Q. How will TIAA-CREF help plan administrators comply with the new regulations? A. TIAA-CREF will conduct a number of webinars for plan administrators in September and October. The webinars will be designed to explain the final 403(b) regulations and describe the impact on 403(b) retirement and FINAL 403(b) REGULATIONS ISSUED BY IRS 11

12 tax-deferred annuity plans. Sample plan language will be developed to amend our existing sample documents. We will also be preparing educational materials to help administrators comply with the new nondiscrimination rules and understand how the new regulations changed transfers and eliminated in-service distributions for employer contributions. TIAA-CREF will also provide monthly updates in Access: TIAA and publish special issues of our administrator e-newsletter as more details become clear. Q. I have questions about the new regulations? Who can I contact? ADDITIONAL EDUCATION AND INFORMATION Link to final 403(b) regulations: hp501.htm Link to the IRS Employee Plans website which already includes educational material on the new rules: 0,,id=172430,00.html Link to DOL Bulletin EBSA Releases 403(b) Plans Guidance: fab html A. Please feel free to contact your TIAA-CREF representative. He or she will be glad to assist you. You may also access the links provided on this page. The tax information contained herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. It was written to support the promotion of the products and services addressed herein. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor. TIAA-CREF Individual & Institutional Services LLC and Teachers Personal Investor Services Inc. distribute securities products Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) New York, NY MMD-6555 (8/07)