Effect of new IRS regulations for 403(b) plans (effective 1/1/2009)
As a result of new government regulation for 403(b) retirement accounts, plan sponsors may be reducing the number of providers offered, likely causing frustration for many hospital, school and non-profit organization workers.
A 403(b) plan typically provides an employee a list of account providers (e.g. Fidelity and Vanguard) from which they select from. It is up to the employee to contact the provider, open up the account and then select the funds they would like to invest in. Unlike 401(k)’s, a participant can select multiple providers and select their favorite funds from each.
These new regulations, the first in 40 years, are intended to make 403(b) plans mirror 401(k) plans. Currently, there is little or no regulation in regards to loans or hardship withdrawals. This is one of the biggest differences between a 401(k) and a 403(b) plan. In a 401(k), the plan sponsor (employer) creates rules in regards to loan amounts, number of loans and payback terms. A 401(k) also has a plan document that spells out all rules that must be followed.
With the new regulations in place, 403(b) providers are now required to enter into an Information Sharing Agreement (ISA). For a plan to maintain compliance with Section 403(b) of the Internal Revenue Code, it will become mandatory to share essential information with plan sponsors and their third party administrators regarding certain transactions, e.g. loans, hardship distributions, etc.
If your current provider has signed the necessary ISA then you will not be affected. If your current provider does not sign the ISA then no new contributions can deposited and you will need to open a new account with an eligible provider. Note: you can leave your existing account where it is, the new IRS regulations do contain a grandfathering provision that protects such contributions.
What can you do if you think you might be affected?
- 1. Contact your 403(b) administrator to find out if your service provider will continue to be offered.
- 2. If a change is needed, research your options of new providers- look at fund choices and fees.
- 3. Contact your 403(b) administrator to let them know where your contribution needs to be deposited (if your current provider is being removed from the approved list).
If you’d like help selecting a provider or managing your account, please feel free to contact an advisor at 877-627-8401 or info@smart401k.com.
Jessica Slaters, Investment Advisor
