"I'm from the government and I'm here to help."
Those chilling words are seemingly on the minds of a lot of people these days, as they consider changes the IRS is contemplating making to 403(b) retirement plans.
For the first time in 40 years, the government is proposing regulations that are shaking up how retirement plans for teachers, churches, and other not-for-profit organizations are administered. The proposals being suggested will ultimately make them more like 401(k) plans, the retirement plans for private-sector employees, and that has many people worried.
Congress created 403(b) plans in the early 1960s for "qualified employers," generally K-12 public schools, colleges, hospitals, churches, libraries, and other organizations covered under Section 501(c)(3) of the Internal Revenue Code. The regulations that were created at the time have remained unchanged since then, but, in essence, they have given teachers and other employees of nonprofits control over their accounts, in consultation with their plan advisors.
Similar to 401(k) plans (also named for a jaw-cracker section of the tax code), employees can set aside money from their salaries on a pre-tax basis and direct it to a financial institution selected by the employer. Since employers offering 403(b) plans had limited involvement in the plan, they were exempt from provisions of ERISA (the Employee Retirement Income Security Act), a complex federal law covering retirement plans. Instead, they simply offered participants a variety of approved vendors from which to choose. Unfortunately, the selections were often meager at best, as they primarily peddled annuities, a tax-deferred investment that doesn't make much sense in a tax-deferred account.
One of the controversial changes the IRS is proposing involves the "written plan document" requirement. Essentially, employers will have to provide written documentation of eligibility and benefit rules and all the investment vehicles offered (annuities and mutual funds) for each plan offered. It will place the administrative responsibility at the employer level, instead of with the employee, thus bringing the plans under jurisdiction of ERISA. When that happens, employers may simply scrap the multiple vendors they currently offer in favor of a single vendor, thereby limiting participant choice.
Other changes that have many in the industry concerned include the elimination of the ability to make tax-free transfers from one 403(b) account to another, only allowing transfers if there is more than one provider in the plan. Other areas affected by the proposed regulations include taxation of the plans, funding vehicles, contribution limits, rollovers, loans, and more.
According to the website 403(b)wise, plans that already operate on the sample documentation outlined by TIAA-CREF, one of the world's largest pension systems, should already meet the requirements and would probably experience little change.
It's a sweeping overhaul, and many speculate that it's part of a larger plan by President Bush to aggregate the various retirement savings plans -- 401(k)s, 403(b)s, 457s, SEPs, Simple IRAs, and SARSEPs -- into a single retirement plan -- his proposed Employer Retirement Savings Account. The president has also proposed revamping the Roth IRA as a new Retirement Savings Account (RSA) and introducing a new savings plan called the Lifetime Savings Account.
The Law of Unintended Consequences is usually at work when the government steps in to help. Many fear that the government's attempt to strip 403(b) plans of their unique status will lead to employers dropping their plans altogether because of the bureaucratic burden it will impose.
With a Feb. 14 deadline looming for public comments, the IRS anticipates the regulations will be completed and take effect after Dec. 31, 2005. It envisions assisting participants by codifying statutory changes that have occurred over the past 40 years, but as is all too often the case, "government assistance" can be a painful oxymoron.
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