New retirement-plan regulations

Kimberlee Sipe
Kimberlee Sipe

Kimberlee Sipe

The “old” 403(b) plans – retirement plans used by many nonprofits – were employer-sponsored plans where each participant had an individual, self-directed retirement account.

These plans had multiple problems: plan providers did not administer the plans in a consistent way, the level of service varied, there was no due-diligence process for investments, and employees were sometimes left with no guidance in terms of investment advice.

The new regulations set out by the IRS are going to change how 403(b) retirement plans operate and are administered.

Essentially, the new regulations for the 403(b) plans require more of a resemblance to corporate group 401(k) retirement plans. Employers will need to be more involved in the day-to-day aspects of how the plan is being administered and serviced.

All 403(b) plans must come into compliance under these new regulations by Jan. 1, 2009, though there are some exceptions for church organizations.

The new IRS requirements address:

  • 1. Having a written plan document that outlines plan eligibility, contribution limits, benefits, distributions and providers, among other features.
  • 2. Universal availability means all employees are eligible to participate in the plan from the first day of employment. However, there can be a vesting schedule for employer contributions. This is the requirement that could cause the most problems for many groups. This is not a new regulation per say, just one that has not always been followed.
  • 3. Exchanges and transfers to and from other contracts or plans.
  • 4. Determining appropriate loan conditions and hardship cases. There are certain monetary limits on how much an employee can loan from his or her 403(b) account. Hardship cases, while managed by the plan sponsor, are determined by the IRS.

Converting a 403(b) to 401(k)?

Another recent trend not directly related to the new regulations, but possibly affecting many nonprofits, is the option of converting a 403(b) to a 401(k) plan.

Perhaps the most important difference between these plans is that 401(k)s are subject to “top-heavy testing.” This is a particularly important issue for a nonprofit with a few highly-paid employees whose salaries greatly exceed those of other staff and who want to be able to maximize their contributions to the plan.

There is a monetary ratio with 401(k)s that stipulates proportionate contributions between higher-salaried employees and lower-paid staff. Highly-paid folks will get contribution refunds from the plan if the ratio is not in sync. A Safe Harbor 401(k) can also negate top-heavy testing concerns, but make sure you consult with you service provider concerning all possible impacts on your plan when considering a plan conversion.

There is no top-heavy testing with a 403(b), so make sure you fully understand all aspects of this risk in converting your plan.

Top-heavy testing with a 401(k) can add costs to the plan, not to mention that employees used to maximizing their contributions in the 403(b) may not be pleased with possible restrictions on their contributions under 401(k) testing.

Keep in mind that if your provider is suggesting switching to a 401(k), it could be because they are not supporting a 403(b) group platform under the new regulations. Depending on your group’s needs, it may be best to consider switching to a different provider instead of switching to a 401(k).

And the deadline looms


  • 1. Many providers are phasing out 403(b) offerings. Be sure you understand all aspects of converting a 403(b) to a 401(k) plan.
  • 2. A financial advisor can help benchmark or evaluate your current plan provider to make sure it’s the best plan for your organization.
  • 3. You must have a plan administrator whether your provider offers plan administration or you have to hire a third-party administrator.
  • 4. All 403(b) plans must come into compliance under these new regulations by Jan. 1, 2009.
  • 5. Further information about the regulations can be found on the IRS website at Search for “403(b) regulations.”

If any of these compliance issues affect your nonprofit, you should get started remedying them immediately. Most plans will take a few months to come into compliance, and it is unknown what the IRS allowances are going to be if a plan is moving towards compliance, but not yet compliant, on Jan. 1, 2009.  Currently, no extensions have been announced.

Failure to comply with new regulations means the entire plan becomes “disqualified.” All assets could lose their tax-favored status if the employer does not maintain a written plan or fails to comply with the universal availability requirements.

Although the new regulations can be overwhelming and seem more costly, they do not have to be if you work with a good team.

The regulations are not intended to make your retirement plan a headache but to improve the plan for everyone involved.

Kimberlee Sipe is a financial advisor at Wachovia Securities in Raleigh, N.C., who specializes in working with retirement plans for nonprofits and small business. She can be reached at 919.782.1200.

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