Changes sought on 403(b) IRS plan rules

As the IRS prepares to roll out its preapproved 403(b) direct contribution plans for certain public employees, the retirement industry is chiming in, hoping to ensure the official guidelines are crystal-clear, specifically when determining severance status and managing non-vested employer contributions.

This week, the American Society of Pension Professionals & Actuaries crafted a joint letter with the National Tax Sheltered Accounts Association, suggesting clarification on these two issues.

For plan administrators, the devil is in the details of these upcoming plans. The final IRS 403(b) wording will direct the “when” and “how” these tax-deferred retirement options are implemented. And as government pensions continue to struggle, there’s every reason to expect the IRS pre-approved 403(b) plans will gain market share, making details like these critical to administrators.

Less common than 401(k) plans, the 403(b) is a defined contribution investment vehicle open to public-sector workers at schools, public hospitals and governments. As public pensions face challenges from coast-to-coast, an opportunity for these accounts seems to be opening up. The IRS suggestions have received mostly positive reactions from the industry, along with specific suggestions such as these from ASPPA and NTSAA

The ASPPA and NTSAA letter speaks directly to two issues in the sample language provided by the IRS in “The Listing of Required Modifications (LRMs) for pre-approved 403(b) plans,” issued in March.

The first concern deals with regulations on collecting benefits.

As the IRS language now stands, when determining when “severance of employment” has occurred, “related employer” status must be determined — meaning the employee is no longer working for the same employer in a different location.

This is of particular concern to teachers who often move from one district to another in the same state. The ASPPA letter suggests removing the “related employer” entirely or clarifying not all public schools in a state are “related employers,” which is how the current IRS regulation reads as defined by the special rules of IRS notice 89-23.

The letter also addressed recordkeeping for non-vested accounts. As it stands, administrators are required to separate the records of forfeitable and non-forfeitable contributions, not actually separate the accounts. ASPPA said the LRM needs clarification on this count. Specifically, it wants to clarify non-vested accounts require separate accounting but not a physical separation of the assets into a distinct custodial account.

Craig P. Hoffman, general counsel and director of regulatory affairs at ASPPA and one of the letter’s co-authors, is hopeful the IRS will respond affirmatively.

“We have a good working relationship with the IRS,” said Hoffman.  “We expect a continuing dialogue on these issues and will see how the program rolls out.”

The ASPPA represents more than 16,000 retirement plan professionals, while the NTSAA is a nonprofit entity that joined ASPPA in order to serve the 403(b) marketplace.


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