The New World of 403(b) Retirement Plans

Transcription

1 LPL FINANCIAL RETIREMENT PARTNERS The New World of 403(b) Retirement Plans Retirement Strategies A Guide to Best Practices for Plan Fiduciaries

2 Introduction Today, nonprofit plan sponsors need to have more oversight and exert more control over their 403(b) program than historically has been the case. As 403(b) regulations tighten and financial markets fluctuate, nonprofit organizations are under greater scrutiny. In 2007, the IRS issued final regulations that updated and consolidated over 40 years of legislative and regulatory guidance, generally effective for taxable years beginning January 1, The Department of Labor (DOL) also expanded the annual reporting requirements that fall on nonprofit plan sponsors. As a result of these changes, it s crucial for nonprofit plan sponsors to understand the new fiduciary responsibilities and to have a due diligence process in place to reduce risk and limit or mitigate fiduciary liability. This paper provides an overview of three important areas of the law affecting 403(b) plans: 1. Fiduciary Duties 2. Form 5500 Reporting and Audit Requirements 3. Final IRS Regulations Contents History Erisa s coverage of 403(b) plans Fiduciary duties Form 5500 reporting and audit requirements Final IRS regulations Conclusion 2 The New World of 403(b) Retirement Plans: A Guide to Best Practices for Plan Fiduciaries

3 LPL FINANCIAL RETIREMENT PARTNERS History It s important to review the history of the 403(b) market to help frame this document and understand why these changes are so revolutionary. Tax-deferred annuities have been available to employees of nonprofit organizations since the early 1940s. In 1958, the advent of Section 403(b) in the Internal Revenue Code (the Code ) formalized the ability of employees in these nonprofit organizations to buy annuities. These 403(b) programs were first offered as a way for employees to defer a portion of their income on a pre-tax basis and have it grow on a tax-deferred basis until retirement. Initially, these programs were all funded with insurance company products known as a 403(b)(1) annuity contract. Over the years, this has been a very retail-oriented market with providers or intermediaries selling annuities to eligible individuals. With the passage of ERISA in 1974, additional investment opportunities were given to employees of nonprofit organizations with the opportunity to purchase mutual fund shares held in a custody account on the same tax-favorable basis as allowed under Code Section 403(b)(7). This too was a labor-intensive retail sale, as brokers of either annuities or mutual funds needed to solicit sales on an individual-byindividual basis. Although this was the industry standard, it was not the most effective or efficient model. 401(k) plans came on the scene in the early 1980s as an employer-sponsored program. Consistent with the terms of ERISA, 401(k) plan fiduciaries select several investment options among which plan participants are allowed to direct their accounts. Since the plan is purchasing the investments, the company benefits from economies of scale, purchasing them on a more institutional rather than retail basis. As the regulations for 403(b) plans continue to change, so too have the available products. Over the past 10 years, providers have developed institutional 403(b) plan investment products with similar workings as 401(k) plans. Eligible employers could now take an active sponsorship approach to their plans. These products were first adopted among community action agencies, healthcare, and charitable nonprofit organizations. Today, the trend for many nonprofit organizations is to centralize their retirement program under a single vendor to ensure compliance and regulatory adherence. Consolidated communication and education also eliminates the need to support a retail-based individual product and further improves the pricing efficiency. This new era in the nonprofit retirement plan market brings new challenges for plan sponsors. The good news is, there is help out there in the form of knowledgeable retirement plan advisors and consultants who can help plan sponsors navigate this new arena successfully. ERISA s coverage of 403(b) plans Many nonprofit 403(b) plan sponsors do not intend for their plans to be subject to ERIS A. It s important for them to understand their compliance obligations and to determine whether ERIS A applies. Generally, a 403(b) plan is subject to ERISA unless it falls into one of three alternative exempt categories: governmental plans, church plans and plans with limited employer involvement. Governmental plan: Sponsored by a public school or public university. Church plan: Sponsored by a church, a convention or association of churches, or an organization that is controlled by or associated with such an organization. While churchsponsored 403(b) plans are generally exempt from ERISA, a subset of church plans enjoys a special status under the Internal Revenue Code, and as noted below, is also exempt from certain Internal Revenue Code-based requirements, including the nondiscrimination rules. This subset of church plans, which we refer to in this paper as controlled church plans, is comprised of plans sponsored by (1) an actual church; (2) a convention or association of churches; (3) an elementary or secondary school which is controlled, operated, or principally supported by a church (or a convention or association of churches); or (4) a qualified church-controlled organization that meets certain requirements described in the Internal Revenue Code. Plan with limited employer involvement: plans in which all of the following apply. There are no employer contributions to the plan. Participation in the plan is completely voluntary. The participant may enforce his or her rights under the plan through the investment vendor, without any employer involvement. The employer receives no compensation for offering the plan. 3

4 The employer s actual involvement with the plan is limited to one of a few actions (e.g., allowing investment vendors to publicize their products, summarizing information provided by investment vendors to employees, holding group annuity contracts in the employer s name, and collecting salary reductions from employees paychecks and remitting them to the investment vendors, etc). The limited employer involvement criteria have become more difficult to meet because the final IRS regulations require more employer involvement. In the Field Assistance Bulletin (expanded upon by Field Assistance Bulletin ), the DOL articulated its position that employers could take all of the actions required by the final IRS regulations and still have sufficiently limited involvement for a salary reduction-only plan to remain exempt from ERISA. For example, the DOL stated that if an employer wishes to take the position that its salary reduction-only plan is exempt from ERISA due to limited employer involvement, even though a plan document is still required. The employer may nonetheless offer optional features (such as participant loans and hardship distributions) as long as the investment vendor, not the employer, is responsible for any discretionary determinations (such as whether to approve a loan or hardship distribution). The employer may not hire a third-party administrator. Generally, the employer must offer more than one investment vendor, unless employees are permitted to transfer or exchange their monies to a different investment vendor while still employed through a contract exchange. However, if the employer can demonstrate that the increased administrative burden of offering multiple investment vendors would cause the employer to stop offering a salary reduction-only 403(b) plan, then it is possible to maintain ERISAexempt status with only one vendor if that vendor offers a wide variety of investment products. An employer cannot retain the right to change investment vendors and move employee funds to the new vendor. In summary, while it is still possible for a salary reduction-only plan to be exempt from ERISA on the basis of limited employer involvement, such exception is narrow and requires careful examination before a plan sponsor concludes that it applies. 1. Fiduciary duties While nonprofit plan sponsors have moved forward with updating their plan documents to comply with the new regulations, many are still concerned about establishing compliance procedures and staying on top of their fiduciary responsibilities. The purpose of this section is to help plan sponsors understand fiduciary duties and to provide information relevant to establishing and operating a fiduciary committee. Some plan sponsors may elect to separate administrative and investment committees with specific responsibilities assigned to each committee. ERISA-Governed Plans. ERISA-governed 403(b) plans are subject to ERISA s fiduciary duty rules. Fiduciaries who breach their duties may be personally liable for any damage they cause to the plan and, possibly, additional penalties under ERISA. Non-ERISA Plans. While ERISA s fiduciary duties do not apply to plans that are exempt from ERISA, sponsors of such plans nonetheless need to act in accordance with fiduciary standards. Many state laws impose similar fiduciary standards. In addition, depending on the circumstances, it might be possible for participants to challenge the claim of ERISA exemption. Who is a plan fiduciary? Under ERISA, every plan must have at least one fiduciary named in the plan document. The named fiduciary is the individual(s) or entity with authority over the plan s operation and administration. It is important for risk management purposes to understand that a plan may have fiduciaries other than the named fiduciary. Any individual or entity who, in function, exercises discretionary authority or iscretionary control regarding management of a plan, exercises authority or control over management or disposition of plan assets, provides investment advice regarding plan assets for a fee, or has discretionary authority over or discretionary responsibility for plan administration is a fiduciary of the plan even if the individual or entity is not named as a fiduciary. This could include, for example, a human resources manager, corporate officers, or investment advisers. 4 The New World of 403(b) Retirement Plans: A Guide to Best Practices for Plan Fiduciaries

5 LPL FINANCIAL RETIREMENT PARTNERS The basic ERISA fiduciary duties ERISA fiduciaries must comply with four basic duties: the duty of loyalty, the duty of prudence, the duty of diversification, and the duty to follow plan documents. The duty of loyalty requires that plan fiduciaries discharge their plan duties solely in the interests of plan participants. This means that all of a fiduciary s actions must be for the exclusive purpose of providing benefits under the plan and defraying reasonable administrative expenses. For example, a fiduciary may not choose a plan vendor based on a personal relationship if the vendor does not represent the best value to the plan. The duty of prudence requires that plan fiduciaries act with the care, skill, prudence, and diligence of a prudent person who is familiar with the circumstances. Notably, this duty is process-oriented: a fiduciary will be judged on the prudence of its decision-making process, not necessarily on the outcome of the decision. If a fiduciary does not have sufficient knowledge or expertise in an area, it needs to seek expert help. In other words, ignorance of a particular subject is no defense for poor plan administration. The duty of diversification requires that plan fiduciaries diversify plan investments to minimize the risk of large investment losses. To meet this duty, the plan sponsor should provide a wide range of investment options so that participants may adequately diversify their portfolios. The duty to follow plan documents requires that plan fiduciaries administer the plan in accordance with plan documents. However, if there is a conflict between the plan documents and a fiduciary s other duties under ERISA, the other ERISA duties prevail. Plan document provisions may not override ERISA s fiduciary duties. Fiduciary duties and plan administrative committees A plan administrative committee is a group of individuals with the authority and responsibility to manage a 403(b) plan. Such authority often is granted under a plan document or charter by the organization s Board of Directors. The committee members are often responsible for overseeing day-to-day administration of the plan and being the final decision-maker in instances of disputes. The committee members are fiduciaries of the plan. Because the ERISA fiduciary duties center on the processes that fiduciaries use in making decisions (rather than focusing strictly on the end results of those decisions), using an administrative committee instead of an individual administrator often helps provide evidence of a reasoned decision-making process if challenged. For example, selecting an investment option for the plan is a fiduciary function. If an investment option performs poorly, a court is unlikely to decide that a breach of fiduciary duty has occurred solely because of the poor performance. Rather, it is more likely to consider whether the fiduciary (or fiduciaries) had a sound decision-making process before choosing the nvestment, monitoring the investment, and choosing to retain the investment option. A committee typically is well-positioned to demonstrate a sound decision-making process for several reasons. First, the committee members often representatives of the plan sponsor s legal, finance, and human resources departments typically have expertise in the workings of a plan. Second, a committee of multiple members has a level of peer review and oversight that may not be duplicated by an individual administrator. Third, the committee will ideally keep minutes of its meetings, which will serve to document the process behind its decisions. Fiduciary duties and plan vendors One of the plan administrator s duties is to select vendors (investment and service providers) for the plan. Like any other decision that affects the plan, the administrator of an ERISA plan must comply with the ERISA fiduciary duties in selecting, monitoring, and terminating plan vendors. Therefore, the plan administrator should document a wellreasoned decisionmaking process. Selection of a plan vendor should involve diligent comparison of several options with the help of their advisor. The administrator should evaluate vendors on key areas of the plan/vendor relationship (e.g., fees, investment option, compliance assistance, and recordkeeping capacity). As with any other fiduciary decision, the administrator should document why a particular vendor was chosen over the others considered. Selection of an appropriate vendor does not end the administrator s duties. The administrator must monitor the vendor to ensure that it is continuing to perform as expected. If performance has decreased in a key area, the administrator will have to decide whether to monitor the vendor more closely to see if the poor performance persists or to terminate the vendor immediately. 5

6 If the administrator considers terminating a vendor, the administrator must consider the full impact on the plan. Notably, contracts with vendors may be tied to investment products with back-end loads, termination fees, or market value adjustments that must be factored into the decisionmaking process. Once the decision to terminate has been made, the administrator should establish a timeframe for the transition to a new vendor. Participants may be entitled to 30-day advance notice if the transition involves a blackout period, where central plan functions (e.g., investment changes and distributions) are unavailable. Further, the plan sponsor s payroll department will require time to coordinate with the new vendor for payroll deductions and transmittals. Based on these considerations, plan administrators should allow as much time as possible for the transition from one vendor to another. Fiduciary duties and investments ERISA offers a measure of protection for plan fiduciaries when participants are allowed to direct their own investments as is almost always the case with 403(b) plans. Specifically, ERISA Section 404(c) provides that if participants are given a menu of investment choices and certain informational disclosures, then fiduciaries are protected from claims that a participant made a poor choice from among the available investment options. However, Section 404(c) does not shield fiduciaries from claims that the menu of investment options was poor. Therefore, fiduciaries should carefully select the investment options that they will offer participants, monitor those investments and make substitutions as appropriate. One tool administrators may use to manage fiduciary risk is an investment policy. An investment policy is a written document that describes the plan s investment goals and offers guidelines about fund selection. Some investment policies provide very specific details about expected fund performance, fees, etc., while others contain few details. A well-drafted investment policy will guide plan fiduciaries as they evaluate and monitor investment options and provide support upon any later challenge for the decisions that were made. In addition, a plan fiduciary could hire an investment advisor to give plan participants individualized investment advice about specific funds and situations. However, there will be a fiduciary duty to select and monitor this professional, so usage of an investment advisor does not absolve the plan fiduciary of its duties. 2. Form 5500 reporting and audit requirements Nonprofit plan sponsors are concerned aboutongoing data retrieval and reporting, as well as being able to retain complete records regarding participant information as required on Form Many are now considering plan changes and consolidating vendors to a single provider to simplify administration and reduce costs. Effective for the 2009 plan year, nonprofit organizations will be required to do a full DOL Form 5500 with Schedules, as well as an external audit (generally, if 100 or more eligible employees on the first day of the plan year). This section provides information on how to determine small or large plan filing status and audit data requirements and resources. A Form 5500 is an annual report filed with the DOL under ERISA and contains a great deal of information about a plan, including participant counts, expenses, and financial statement information. As discussed below, certain plans are subject to an annual audit requirement, which means that an independent qualified public accountant must review and audit the plan s documentation, operations, and finances, and issue a report setting forth the findings. ERISA-exempt plans governmental plans, church plans, and plans that meet the limited employer involvement exception do not file Forms Pre-2009 Form 5500 reporting Before the 2009 plan year, reporting for 403(b) plan was very limited. Essentially, the plan sponsor only had to report basic information (i.e., name of plan, plan sponsor, plan administrator, etc.). The plan sponsor did not have to report participant counts, expenses or financial statement information, and a plan audit was not required. New Form 5500 reporting requirements Beginning with the 2009 plan year, the limited reporting approach is abolished for 403(b) plans. Small 403(b) plans generally will be exempt from the plan audit requirement and may be able to file the Form 5500-SF (short form). Generally, a small plan is a plan with fewer than 100 participants on the first day of the plan year. For this purpose, a 6 The New World of 403(b) Retirement Plans: A Guide to Best Practices for Plan Fiduciaries

7 LPL FINANCIAL RETIREMENT PARTNERS participant includes any active employee with a plan account, any active employee who is eligible to contribute to the plan (even if the employee never contributed and does not have a plan account), any former employee with a plan account, any retiree receiving benefit payments, and any deceased participant whose beneficiaries are entitled to benefits. There is a noteworthy exception to the 100-participant threshold. Under the rule, a plan with more than 80 and fewer than 120 participants may file the same type of Form 5500 that it filed for the previous year. For example, if a plan had 90 participants and filed a Form 5500-SF in year 1, then had 110 participants at the beginning of year 2, it could continue to file the Form 5500-SF for year 2 because of the rule. If the plan then had 140 participants at the beginning of Year 3, it would have to file the full Form 5500 because it would no longer fall within the rule. Large 403(b) plans file a Form 5500, with more extensive reporting than under a Form 5500-SF. Perhaps the most significant difference is the need to have an audit of the plan performed by an independent qualified public accountant. This report provides the auditor s opinion as to whether the plan financial information included with the Form 5500 is presented fairly and in accordance with generally-accepted accounting principles. The auditor also reviews the plan s documentation and operations. At least initially, the plan audit requirement might be difficult for many 403(b) plan sponsors. To complete the report, the auditor will need information on the various annuity contracts and accounts held under the plan. Due to the historically decentralized nature of 403(b) plans, this information might be difficult to gather. If information is unavailable for some plan assets, the auditor likely will be compelled to issue an adverse, qualified, or disclaimed opinion and the Form 5500 would likely be rejected by the DOL. Audit Transition Relief To address these concerns, the DOL issued Field Assistance Bulletins and A contract or account that meets all of the following criteria can be excluded from consideration for purposes of Form 5500 reporting: The contract or account must have been issued before January 1, The contract or account must have been frozen as of January 1, 2009 (i.e., no contributions, including salary deferral contributions, have been made to the contract or account for any period on or after January 1, 2009). The rights and benefits available under the contract or account must be legally enforceable by the participant against the investment vendor without any employer involvement. The participant must be fully vested in the contract or account. The DOL stated that it will not reject a Form 5500 filing on the basis of an adverse, qualified or disclaimed audit if the auditor expressly states that the sole reason for such an opinion was the exclusion of pre-2009 contracts or accounts meeting the criteria above. Notably, participants whose only plan assets meet the criteria above do not need to be counted as participants for purposes of determining whether a plan exceeds the 100-participant threshold for plan audit purposes. For plans with close to 100 participants, exclusion of these individuals might allow the plan to avoid the need for an audit. Compliance going forward Going forward, plan sponsors will need to keep better records relating to their plans. To enable accurate Form 5500 reporting, plan sponsors should be sure to retain complete records regarding participant information, contract and account balances, and investment statements. Auditors will be asking detailed questions about plan reporting and governance, service providers, risk of fraud, and operations. The more prepared the plan sponsor, the more smoothly the audit process will go. The American Institute of Certified Public ccountants has a 403(b) resource center on its website at The resource center includes 403(b) plan Frequently Asked Questions, a list of questions that auditors should ask plan sponsors, and information on selecting a plan auditor. Overall, plan sponsors will have to take a more active role in the management of their 403(b) plans with the help of their advisor. Previously, plan sponsors could allow 403(b) plans to operate with little active management. Now they have to be more hands-on to make sure their 403(b) plans comply with all of the current rules. 7

8 3. Final IRS regulations The new 403(b) regulations place some challenging new demands on the plan sponsor. With rules covering everything from plan documents to distributions, these regulations have had a dramatic effect on the way 403(b) plans operate. Many plan sponsors are confident that their plan documents are compliant, however, they are just starting to establish processes and controls for managing their operational procedures. Plan document requirement One of the most sweeping changes is that the IRS now requires all 403(b) plans (except controlled church plans) to have a plan document. Before the final regulations, only 403(b) plans that were subject to ERISA needed to have a written plan document. The plan document does not have to be a single document. Rather, it may be comprised of a written plan, insurance policies, annuity contracts, and custodial agreements collectively. The plan document must reflect the material plan terms regarding eligibility, contributions, IRS limits, funding vehicles, distribution options, any optional provisions (e.g., loans, hardship withdrawals, and rollovers), and the party responsible for plan administration. Regular payroll deduction contributions Under the final IRS regulations, employees may contribute on a pre-tax basis up to the annual contribution limit ($17,500 in 2013, as indexed for inflation) and must be given an effective opportunity to start, stop, or modify their deferral elections at least once per year. No other benefits (except matching contributions) may be made contingent on whether the employee contributes to the 403(b) plan. Section 403(b) plans (other than controlled church plans) that permit any employee to make payroll deduction contributions must allow all employees (with certain narrow exceptions) to do so. This is known as the universal availability requirement, and the final regulations make several changes to it. Previously, a part-time employee could be excluded from making payroll deduction contributions if the employee normally worked a fewer than 20 hours per week. The final regulations altered this standard so that a part-time employee may be excluded only if the employer reasonably expects the employee to work less than 1,000 hours in the employee s first 12-month employment period and the employee actually meets that expectation. For each subsequent plan year, there is a look back requirement. In addition, the categories of employees that may be excluded from making payroll deduction contributions have been narrowed to the following groups: (1) those employees eligible to participate in another 403(b) plan, a 457(b) governmental plan, or a 401(k) plan of the employer; (2) non-resident aliens with no U.S. source income; and (3) students performing certain services for a school, college or university. Catch-up contributions The new IRS regulations also modify some of the catch-up contribution rules. The age-50 catch-up contribution rules remain the same: employees age 50 and older may make additional contributions to the plan, above the ordinary contribution limits, up to the additional catch-up contribution annual limits (an additional $5,500 in 2010, as indexed for inflation). However, the rules for qualified organization catch-up contributions have changed slightly. Previously, the only employees who could make such catch-up contributions were those with at least 15 years of full-time service who were employed by a qualified organization: a hospital, a church-related organization, an educational organization, or a health and welfare agency. With the final regulations, the definition of health and welfare agency has been expanded to include adoption agencies and certain home health agencies. The qualified organization catch-up contribution limit remains the same: the lesser of (1) $3,000; (2) $15,000 minus the cumulative amount of qualified organization catch-up contributions plus designated Roth contributions made in prior years; and (3) $5,000 times the number of years of service, minus the cumulative amount of payroll deduction contributions made in prior years. Employer contributions The final regulations tighten the nondiscrimination rules for employer contributions, making such contributions subject to the same nondiscrimination rules as qualified retirement plans. The more permissive safe harbor provisions of IRS Notice generally no longer apply. Governmental plans and controlled church plans are exempt from the employer contribution nondiscrimination requirements. Other church plans are subject to the nondiscrimination requirements, but under a more liberal transitional structure than other plans. 8 The New World of 403(b) Retirement Plans: A Guide to Best Practices for Plan Fiduciaries

9 LPL FINANCIAL RETIREMENT PARTNERS Employer contributions to plans subject to the nondiscrimination requirements must be structured to meet: The minimum coverage requirements: generally, the percentage of non-highly compensated employees receiving contributions must be at least 70% of the percentage of highly compensated employees receiving contributions. The nondiscriminatory amount requirements: generally, non-matching contributions must be a uniform percentage of pay, and matching contributions (as a percentage of pay) for highly compensated employees cannot exceed such contributions (as a percentage of pay) for non-highly compensated employees. The nondiscriminatory benefits, rights and features requirements: generally, significant plan features like service-based levels of matching contributions must be available to a group that satisfies the minimum coverage requirements. In addition, the final regulations recognize the practice of providing employer non-matching contributions for the 5-year period following termination of employment, using the former employee s pay in the final year of service as the basis for compliance with the Internal Revenue Code contribution limits. Funding The final regulations limit 403(b) plan funding to annuity contracts and custodial accounts (and retirement income accounts, for church plans). Contract and account documentation must provide for compliance with certain requirements, such as deferral limits, availability of direct rollovers, and minimum distributions. The final regulations address the timing for depositing participant contributions withheld from payroll. Previously, only ERISA plans had to comply with DOL rules about the timely depositing of participant contributions. There were no similar rules for non-erisa plans. The DOL rules require that elective deferrals be deposited to the plan by the earliest date on which they may be segregated from the employer s general business assets, but no later than 15 business days following the month in which the deferrals were withheld from employee paychecks. For small plans generally lose with less than 100 participants deferrals transmitted within 7 business days from the date they were withheld will be deemed to comply with the DOL rules. ERISA plans must still comply with these DOL rules. But now, even non-erisa plans must remit employee deferrals within a reasonable period of time after they are withheld from employee paychecks. While the rule for non-erisa plans is not as bright-line as the ERISA plan rule, it still imposes a duty of reasonableness where there was none before. Distributions The rules regarding distributions of elective deferrals, aftertax contributions, rollovers, and employer contributions held in custodial accounts have not substantially changed. After-tax employee contributions and rollovers may still be distributed at any time, while elective deferrals and employer contributions held in custodial accounts may be distributed only upon severance of employment, death, disability, age 59½, or financial hardship. The final regulations now define severance of employment to mean the time when an employee terminates employment with an employer eligible to sponsor a 403(b) plan, even if the employee remains employed by another employer that is part of the same controlled group (but not eligible to sponsor a 403(b) plan). Example: Catherine is employed by a tax-exempt hospital and participates in its 403(b) plan. The hospital is affiliated with a taxable medical practice group (which is not eligible to sponsor a 403(b) plan). Catherine terminates employment with the hospital and begins working for the medical practice group. She is eligible for a distribution from the 403(b) plan even though the medical practice group is affiliated with the hospital and is in its controlled group. The final regulations changed the rules governing distributions of employer contributions held in annuity contracts. Employer contributions to annuity contracts issued prior to January 1, 2009 may be distributed at any time. However, employer contributions to annuity contracts issued on or after January 1, 2009 may be distributed only upon severance of employment, death, disability, attainment of a stated age, or completion of a fixed number of years of service. The final regulations permit 403(b) plans to be terminated and their assets distributed. Previously, it was often not possible to terminate a 403(b) plan because there was no authority for distributing salary reduction or custodial account assets to participants 9

10 who remained actively employed. The final regulations allow for distributions upon plan termination, provided that the plan sponsor (and its affiliates) does not make contributions to another 403(b) plan covering the same group whose plan terminated 12 months after the plan termination date. Exchanges of contracts and tax-free transfers Previously, IRS Revenue Ruling allowed a 403(b) participant who was not otherwise entitled to a distribution to transfer 403(b) funds to a different 403(b) funding vehicle, without income inclusion, as long as the new funding vehicle imposed the same (or more stringent) distribution restrictions. The IRS came to view this practice as a source of noncompliance because such transfers made it very difficult for an employer or third party administrator to monitor the transferred funds. The final regulations address this concern by requiring a 403(b) plan to have a formal information sharing agreement with any vendor that receives such a transfer after September 24, 2007 who is not an authorized investment provider under the plan. Many plan sponsors have decided that information sharing agreements are too burdensome, and therefore prohibit in-service transfers to 403(b) funding vehicles that are not included in the plan sponsor s lineup. In addition, the final regulations allow an in-service transfer to another 403(b) plan. Certain technical requirements must be met, including that the participant must be a current or former employee of the sponsor of the receiving plan, and the receiving plan must maintain any legally-required distribution restrictions that were in effect before the transfer. Conclusion The 403(b) plan rules have undergone a complete overhaul in the last few years and the current state of the market is one of flux. Most nonprofit plan sponsors recognize how these significant changes affect their organizations as well as their participants. However, with the new IRS regulations, DOL reporting requirements and the array of fiduciary considerations involved with maintaining a plan, they face significant challenges in carrying out their new responsibilities. In partnership with the advisor community, a trend of shifting the burden of managing a retirement plan from the organization to dedicated nonprofit professionals continues. 10 The New World of 403(b) Retirement Plans: A Guide to Best Practices for Plan Fiduciaries

11 LPL FINANCIAL RETIREMENT PARTNERS Notes: 11

12 Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. For Plan Sponsor Use Only - Not for Use with Participants or the General Public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation. The extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. For advisor use only. Not for distribution to the public. Member FINRA/SIPC. RP Tracking #