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Many School Districts AWOL on 403(b) Compliance by David K. Young
I recently attended a self-defense class where the Color Code of Mental Awareness, a system of military readiness credited to Colonel Cooper's adaptation of the Marine Corps system in his book, Principles of Personal Defense, was discussed. For those unfamiliar, the color code is: White — unaware, unprepared, daydreaming Yellow — relaxed but alert Orange — specific alert and decision-making in process Red — the fight is on Black — panic, frozen, flight Many in our society operate their lives in the White zone of unawareness. They are on their cell phones, listening to their iPods, or just plain in La La land. When confronted with a threat they often go from dazed and confused to the frozen panic of code Black. When it comes to the new 403(b) regulations, it is my opinion that too many employers sponsoring 403(b) plans are operating in the unaware, unprepared White zone when they need to be in code Orange and preparing to move to code Red. After all, we are now well into calendar year 2009, the year the new IRS Section 403(b) regulations became effective. Or as the Marines might view it: the fight is on and has been on. As many know, the regulations represented the first major change in the 43-year history of the 403(b), a tax deferred retirement plan available to certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. To review briefly the final regulations require: A written plan document defining: eligibility, loans, distributions, transfers, and contributions Annual "universal availability" notification of ability to participate Modification of transfers (elimination of outside-of-plan "90-24" transfers) Elective deferral limits were defined Execute information sharing agreements with "approved" providers of investment products. These rules may seem simple at first glance, but the devil is in implementation, even for well-meaning third party administrators and vendors. Part of the problem, I believe, is that employers are failing to comprehend the importance of compliance. Many are either not concerned with this new responsibility or are being guided by advisors who are cavalier about the responsibility. One employer got the following advice: "It's status quo." While I have no hard statistical data, my experience consulting with school districts and my discussions with other professionals nationwide, leads me to believe that at least 60 percent of school districts are out of compliance with some part of the new 403(b) regulations. It is clear to our firm that distributions and loans continue to be made without sharing information among the various vendors or following procedures as required by the final regulations; information sharing agreements are not in place (or are not being complied with); and plan documents are missing or incomplete. In addition, if a nonprofit does not have a statutory exemption from ERISA, there are additional issues that must be addressed, including Summary Plan Description requirements and the filing of IRS Form 5500 with the EBSA, IRS and DOL. On the subject of information sharing on loan provisions, a response we have been getting from plan sponsors, insurance agents, and insurers is: loan provisions for annuity products are addressed under ERISA (Employee Retirement Income Security Act), and school districts are exempt from ERISA. I agree that school districts are exempt from ERISA, but I believe the language of IRS Section 403(b) – 6(f), which covers loans, is actually quite similar to the language in ERISA on this issue. I have consulted with several experienced employee benefits attorneys and it is their opinion that a school district should administer loans associated with their 403(b) plan in a similar fashion as employers who sponsor 401(k) plans under ERISA. If employers feel they can ignore the IRS concerning these final regulations they should think again. The IRS fully expects compliance and will sanction employers who ignore the rules. School districts reading this may want to refer to the ASBO (Association of School Business Officials) Compliance Checklist (.pdf).
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David K. Young is the owner of David K. Young Consulting, LLC, a firm specializing in benefit consulting and administration.