IRC 403(b) Tax-Sheltered Annuity Plans – Written Program: Mandatory Provisions
A 403(b) plan’s written program must contain all the following material terms and conditions:
Eligibility – The plan must explain who may participate.
If a plan, other than a church plan, allows elective deferrals (salary deferrals), it must satisfy universal availability, which means that if the plan permits one employee to defer salary, it must extend this offer to all employees with limited exceptions.
Benefits – Generally, the Code requires that employer contributions (other than in a governmental plan, a church plan or a 403(b) plan safe-harbor 403(b) plan) satisfy the following nondiscrimination requirements:
- the percentage of highly compensated employees as compared to non-highly compensated employees benefiting under the plan is not unduly high according to the minimum coverage tests;
- does not favor HCEs in terms of contributions, benefits, rights, features, plan amendments or plan terminations; and
- the average contribution percentage rules relating to matching and after-tax employee contributions.
Limitations – Contribution and benefits under a 403(b) plan, including all aggregated plans, contracts or arrangements of the employer, must comply with the following limits:
- Amount of compensation that can be considered;
- Annual additions; and
- Amount of elective deferrals, if the plan allows elective deferrals.
Contracts (investments) under the plan – Individual accounts in a 403(b) plan can be any of the following types:
- An annuity contract, which is a contract provided through an insurance company,
- A custodial account, which is an account invested in mutual funds, or
- A retirement income account set up for church employees.
403(b) plans cannot be funded with life insurance (issued after September 24, 2007), endowment, health, accident or other types of insurance contracts.
Timing and form of plan benefit distributions – The plan may not distribute any amounts unless a participant:
- severs employment
- has a hardship (limited to amounts attributable to employee elective deferrals only),
- becomes disabled (within the meaning of IRC Section 72(m)(7)), or
- reaches the age of 59 ½.
The written program must state any form in which the plan may pay benefits, such as a lump sum distribution or annuity.
- Sample Plan Provisions – To assist in drafting 403(b) prototype plans
- Model Plan Language for Public Schools – Provisions that public schools may use to draft a written program that reflects the final 403(b) regulation’s requirements Other types of eligible employers may also tailor the model language to use for their 403(b) plans.
- Recent Guidance Affecting 403(b) Plans
- Department of Labor’s Reporting and Coverage for 403(b) Plans – Includes FAB 2010-01, which discusses Annual Reporting (Form 5500) and ERISA coverage for 403(b) Plans
- 403(b) Plan and Related Publications
- Frequently Asked Questions – 403(b) Tax-Sheltered Annuity Plans
- Retirement Plans FAQs – About automatic enrollment, loans, hardship distributions, designated Roth accounts and more