New Transfer Rules under Section 403(b) Regulations Effective September 24, 2007

On July 23, 2007, the Internal Revenue Service issued final regulations on tax-sheltered annuity plans under Section 403(b) of the Internal Revenue Code.^* The final regulations are generally effective for taxable years beginning on or after January 1, 2009. However, one important provision of the final regulations is effective September 24, 2007. This provision adds new rules governing transfers from one investment vehicle to another within a plan, now called "exchanges."

THE NEW TRANSFER RULES FOR EXCHANGES WITHIN A PLAN

In order for an exchange to be a non-taxable event, the §403(b) plan must satisfy the following requirements:

• The plan under which the contract is issued provides for the exchange.
• The participant (or beneficiary) has an accumulated benefit immediately after the exchange that is at least equal to the accumulated benefit immediately before the exchange.
• The recipient contract is subject to distribution restrictions that are at least as stringent as under the exchanging contract.
• The employer enters into an agreement with the recipient contract to share information regarding employment status, hardship withdrawals and plan loans.

These new rules apply to any exchange that takes place after September 24, 2007. Therefore, employers should take action as soon as possible to ensure any contract exchanges made after such date comply with the new rules. It may be important for employers to inform §403(b) plan participants of the restrictions on transfers, so that participants may avoid taking actions that inadvertently cause their §403(b) contracts to become taxable.

NEW PLAN-TO-PLAN TRANSFER RULES

The final regulations contain similar rules for transfers between plans, also effective September 24, 2007, where the participant whose assets are being transferred is an employee or former employee of the employer maintaining the receiving plan. However, an information-sharing agreement is not required for plan-to-plan transfers.

Sibson can be retained to work with plan sponsors and their attorneys on compliance with these new transfer rules.

*	To see the final regulations, click here. (To return to the Compliance Alert text, click here.)

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.

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