Get a handle on the new retirement regulations

By John Butler and Christine Abrams

The Internal Revenue Service issued new rules and regulations affecting all 403(b) retirement plans in 2007. Most elements became effective January 1, 2009, with some delayed until January 1, 2010. You should be aware of three important issues about these new regulations as they relate to your church.

Plan documents

Effective January 1, 2010, nearly all 403(b) programs are explicitly required to have a plan document outlining the details of the program. Many church plans, however, are effectively exempt from this requirement. Churches that only offer a retirement benefit through a denominational program can rely on the denominational plan document, and do not need their own. Churches with their own 403(b) plans offering investment options through mutual funds and insurance annuities only are technically exempt, though a plan document is strongly recommended.

A church 403(b) plan with “retirement income accounts” (described in section 403(b)(9)) is now required to have a plan document. Retirement income accounts under 403(b)(9) are used in denominational 403(b) plans, and almost never used in local church plans.

While most churches are not required to have plan documents, several 403(b) compliance requirements are easier to handle with a formal plan document. These include:

•           Consistent application of eligibility and contribution        policies

•           Identifying and monitoring maximum contribution requirements

•           Loans to participants

•           Hardship withdrawals

•           Distribution notice requirements

•           Plan termination

Plan documents should address details such as:

•           Who has administrative responsibility for the plan?

•           Investment options

•           Eligibility requirements

•           Contribution and distribution provisions

•           Loan provisions

The legal requirements of plan documents make them unsuitable as a “do-it-yourself” project. If you’re using a mutual fund company or other investment advisor, they may be able to provide boilerplate language to serve as a starting point.


In a major change, all plan sponsors, including church and other 403(b) programs exempt from ERISA, must have information-sharing arrangements with all companies providing mutual funds or annuities.

Under the new rules, employer plan sponsors and investment managers must communicate with each other about employee investment activities. Information that typically must be communicated includes:

Whether a plan participant is employed and when a participant’s employment is severed; which optional provisions are selected or allowed by the plan, such as loans, hardship withdrawals and rollovers, and who is responsible for administering them.

Employer notifications

For hardship withdrawals, the participant’s section 403(b) account balances must be shared. Plan loans and any rollover accounts available to the participant under the plan must be used to meet the financial-need safe harbor for hardship withdrawal. The employer must be notified of a hardship withdrawal, since the withdrawal results in a six-month suspension of the participant’s right to make elective deferrals must be included.

For plan loans, the amount of any plan loan outstanding to the participant, to determine loan limitations; whether contributions are regular elective deferrals, Roth elective deferrals or non-elective deferrals; identification and amount of rollover from another plan or IRA, and any restrictions applicable to the rollover.

For Qualified Domestic Relations Order (a special distribution order in a divorce proceeding), the employer’s and investment companies’ response and implementation.

Generally,  newer  contracts between employers and 403(b) investment providers address these issues. For instance, there may be a list of items that the investment company will provide to the employer, and a list of items the employer must provide to the investment company. These new information-sharing arrangements should have been in place before January 1, 2009.

Church exemptions

Church plans continue to be exempt from ERISA and filing the Form 5500 annual return. However, all 403(b) plans subject to ERISA must file an increasing amount of information about their plans through their Form 5500. ERISA-covered 403(b) plans with more than 100 participants will be subject to independent audit requirements.

Church plans also continue to be exempt from non-discrimination requirements applicable to other 403(b) plans. This exemption allows a church to provide a larger contribution for pastors or other selected employees. Even churches planning to be generally non-discriminatory benefit by avoiding discrimination testing.

Action points

Consider whether your church should adopt a new plan document, if it has not already done so. Potential sources of assistance include attorneys, plan administrators, insurance companies and a few mutual fund providers. To simplify compliance, you should also consider whether you want to prune the number of investment advisors you allow in your plan. Ask any investment providers you use in the future how they will provide the required communications.

John Butler is tax counsel and Christine Abrams is tax manager for Capin Crouse LLP, Greenwood, IN. [ ]

This article is intended to provide accurate and authoritative information in regard to the tax issues covered. It is provided with the understanding that the authors are not engaged in rendering specific accounting or tax advice.If tax or other expert assistance is required, the services of competent professional persons should be obtained.


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