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June 12, 2009
Section 403(b) Plan Participants Need to Correct Defective Contract Exchanges by June 30
Section 403(b) plan participants who made defective contract exchanges after September 24, 2007, and before January 1, 2009, have until June 30, 2009 to be sure that any contracts received in defective exchanges are corrected in order to avoid the risk of contract amounts becoming immediately taxable.
Defective Contract Exchanges
Contract exchanges after September 24, 2007 and before January 1, 2009, that otherwise met the applicable contract exchange rules1 are defective if the exchange was to a contract from a vendor that was not an "approved vendor" (i.e., not a vendor currently receiving contributions under the plan) and that did not have, or did not put into place by December 31, 2008, an agreement with the plan sponsor to share information necessary for proper plan administration (an "information sharing agreement" or "ISA").
Absent corrective action under the transition relief described below, the defective contract exchange is a taxable event.
The Correction Process
Participants may avoid the risk of immediate taxation by "re-exchanging" the contract for a contract with an approved vendor or with a vendor that has an ISA in place with the plan sponsor.2 This transition relief, available to plan participants until June 30, is applicable to contracts exchanged after September 24, 2007, and before January 1, 2009, where the new contracts were issued by vendors that were not approved vendors under the plan and that, as of December 31, 2008, did not have an ISA with the plan sponsor.
Plan Sponsors Might Want to Inform Participants
Plan sponsors whose plans permitted exchanges with non-approved vendors after September 24, 2007, and who did not enter into ISAs with such vendors by January 1, 2009, might wish to remind plan participants of the upcoming deadline and the need to re-exchange any such contracts back into the plan in order to avoid the potential income tax consequences.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for authoritative advice on the interpretation and application of the Internal Revenue Code, including §403(b). Sibson Consulting can be retained to work with sponsors of §403(b) plans and their attorneys on compliance and participant communications.
- 1
- Before the final 403(b) regulations became effective, the rules governing contract exchanges were set out in Rev. Rul. 90-24 1990-1 CB 97. The rules in the final regulations are similar but include the requirement of an ISA. See Treas. Reg. 1.403(b)-10(b). (Click on the following text to return to the Compliance Alert.)
- 2
- See §8.03 of Revenue Procedure 2007-71, which is on the IRS Web site. Under the final §403(b) regulations, which were published in the July 26, 2007 issue of the Federal Register, in order for a contract exchange to be a non-taxable event, several requirements must be satisfied. For a summary, see Sibson Consulting's October 2007 Bulletin, "Long-Awaited Final Section 403(b) Regulations." For more information about §403(b) compliance, see Sibson's September 19, 2007 Compliance Alert, "New Transfer Rules under Section 403(b) Regulations Effective September 24, 2007" and March 13, 2008 Compliance Alert, "New IRS Guidance for §403(b) Plans." (Click on the following text to return to the Compliance Alert.)
Compliance Alert, Sibson Consulting's periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.