For the first time in more than 40 years, the Internal Revenue Service has dramatically rewritten federal regulations that govern 403(b) plans, the deferred-benefit retirement plans that are common in higher education and the nonprofit world generally.
The new rules, which were released Thursday and described Sunday by the IRS's Robert J. Architect at the annual meeting of the National Association of College and University Business Officers, represent a "sea change" for the many public and private colleges that offer 403(b) plans, Architect said.
The changes, most of which take effect as of January 1, 2009, will generally bring the rules governing 403(b) programs more in line with those for the 401(k) plans that predominate among businesses and an increasing number of larger nonprofit institutions. The IRS issued a proposed set of these rules in 2004, and in the interim period many higher education institutions have begun adopting many of the practices laid out in the final rules that were issued last week.
The most significant change in the new rules -- a requirement that all employers who offer such plans lay out their policies for them in a written plan, either in a single document or in a compilation of existing and related documents -- is unlikely to require much in the way of new work for colleges. Most of them already have such plans because they treat their 403(b) programs as subject to the Employee Retirement Income Security Act of 1974, and current law already requires ERISA-compliant 403(b) programs to be operated according to a written plan document.
But Architect, a senior tax law specialist for the IRS’s Tax Exempt and Government Entities Division, said that the requirement that all employers provide written plans for their 403(b) programs will make it easier for the agency’s investigators and auditors to hold all employers, including colleges and universities, accountable for whether they are providing the benefits and meeting the conditions that they promise to employees. Providers of 403(b) programs “will start having examination issues: Are you following the terms of that plan? Have you amended that plan?” in a way that they typically have not in the past, Architect said.
The new regulations also alter the requirements for which sorts of employees may and may not be excluded from the opportunity to participate in an institution’s 403(b) plan. The new rules continue to allow non-resident aliens, students, employees (like many high-profile coaches and other highly compensated employees) who are eligible for other deferred-income plans, and employees who work an average of fewer than 20 hours a week (over the course of a year) to be excluded.
The new rules would eliminate existing exemptions for most visiting professors, employees of a religious order who have taken a vow of poverty, employees who “make a one-time election to participate in a governmental plan instead of a 403(b) program,” and many employees covered by a collective bargaining agreement.
Most college finance officials who attended Sunday’s presentation said they had not had time to digest the hundreds of pages of new rules, and that they therefore did not have a clear sense of how significant the impact would be.
Significantly more detailed information about the new rules is available from the following sources: