A §403(b) Plan is designed to benefit eligible employees of certain tax-exempt Employers, such as public educational organizations and hospitals, which are tax-exempt under IRS Code §501(c)(3).  

Below are some features of a §403(b) Plan:

• Permissible investments are annuity contracts and mutual fund custodial accounts.

• An account that permits investments in bonds, Treasury bills, brokerage accounts, or stocks other than mutual funds shares is not a proper §403(b) custodial account investment because §403(b)(7) permits a custodial account only to hold mutual fund shares.

• A traditional §403(b) Plan takes the form of a salary reduction agreement, allowing eligible participants to defer a part of their salary into the plan as elective employee contributions. [Click Annual Plan Limits].  Under this arrangement, the Employer's role is extremely limited.

• Plan participants who are age 50 or older are eligible to make "catch-up" deferrals to the plan, within IRS annual plan limits. [Click Annual Plan Limits]

• As long as the Employer's involvement with the §403)(b) Plan is limited to making information available to employees, and withholding and forwarding the contributions to the insurance company or custodial account, the plan will generally not be subject to the ERISA requirements.  In such cases, Form 5500 has not been required historically. 

• Discretionary and/or fixed Employer contributions may be made in the form of "profit sharing" style contributions for all eligible participants, or "matching" contributions on behalf of the employees who make elective employee contributions.

• If Employer contributions are made, strict nondiscrimination testing must be applied in order to make sure the plan does not adversely favor "highly compensated employees."  [Click Annual Plan Limits]

• Once Employer contributions are made, ERISA coverage, vesting, and reporting laws must be considered.  An annual Form 5500 is required in such cases.  Under IRS Final Regulations issued in 2007, the limited exception to the annual Form 5500 ceases to apply.  That is, any §403(b) plan that is subject to Title I of ERISA, for plan years beginning on or after January 1, 2009, must file a complete Form 5500 like that of any other qualified employer plan.  This would include an independent auditor's opinion, for example, if there are more than 100 participants as of the beginning of a plan year.

• The plan can apply a vesting schedule to Employer contributions.  Elective employee contributions are always 100% vested.

• The Employer decides how many "bells and whistles" the plan will offer, such as Participant Loans.

• In 2007, IRS issued Final Regulations that govern §403(b) plans, including "deferral-only" plans.  Among other things, the Final Regulations require a written plan document be maintained as well as "information sharing agreements" among vendors.  Employers are urged to review their current §403(b) program to comply with these broad new requirements, generally effective January 1, 2009.

Please call Hembree TPA, Inc. at (888) 486-401k or e-mail us at info@hembreetpa.com to establish a new §403(b) Plan or review an existing §403(b) Plan.

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