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IRS May Tighten School Plans

The Internal Revenue Service is asking that sponsors have a single rule that governs 403(b) plans.

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The Internal Revenue Service is asking that sponsors have a single rule that governs 403(b) plans. Current rules do not mandate that 403(b)s even have plan documents--much of the time the plans have rough guidelines that would not ordinarily meet the standards of a 401(k) plan. Todd Buchanan, senior v.p. at AIG VALIC, expects the regulations will be finalized by the second quarter.

Buchanan said the plan document requirement could cut down the number of vendors used by many sponsors in K-12 public schools. AIG will implement its K-12 Retirement Plan Manager, designed with the new rules in mind, in the coming months.

Mike Beczkowski, a consultant at Bolton Partners, said these regulations will simplify the way 403(b) plans work. “They will operate more like 401(k) plans, which will be a good thing.” He said there will be more oversight, because the documents will be by definition clearer. This could also be a move towards putting 403(b)s under ERISA the same way 401(k) plans are.

He also agreed with Buchanan that simplification could reduce the number of vendors sponsors use. Traditionally a lot of 403(b) sponsors use multiple firms. Beczkowski added that making 403(b)s and 401(k)s more similar will make it easier for participants, as there is often some confusion for them as the different plan types operate differently.

Evan Giller, senior counselor at TIAA-CREF, said the new IRS rules could make things more difficult for 403(b) plans. “It would add a whole regime of complicated administrative duties to plans that are not accustomed to reporting requirements and filling out 5500 reports.” Giller said there will likely be alterations in the final regulations as they are drafted. He was skeptical that 403(b)s would ever come under ERISA, but said they are likely to become more like plans that do.

Not everybody thinks the changes will be that dramatic. Corinne Eisenstein, former president of the Connecticut Association of School Business Officials, said an official from the IRS visited CASBO and told them that the requirements are going to look a lot different from what they look like now. “But by what he told us, I’m not too concerned with complying with the regulations.”