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Changes to 403(b) plans

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Introduction

The 403(b) plan in America is a plan for retirement which is tailored for ministers, public schools, tax exempt organizations employees. This plan also caters for individual employees whom are legible 403(b) account holder. There are three type of 403(b) plan account this include; (I) Insurance company annuity contract this plans are also known as tax sheltered annuities (TSAs) or tax deferred annuities (TDAs). (II) Custodial account which is granted during retirement account custodian, investment in this venture are limited and projected toward controlled invested companies like the mutual funds. (III) Retirement income account for this account the investment option is limited to either annuities or mutual funds. Usually the employer(s) have the upper hand in determining with which financial institution that the employees should hold their 403(b) accounts (Everett, 1999).

The 403(b) plan tax treatment is also similar to the 401(k) plan this transpired after the Economic Growth and Tax Relief Reconciliation Act of 2001.  This occurs when the salaries of employees are deferred into a 403(b) plan are authorized before the payment of income tax and this allows deferred tax growth till the money is withdrawn form the plan after being taxed as income. In the beginning of 2006 the changes that occurred on 403(b) and 401(k) plan was designed to capacitate designated Roth contributions like after tax contribution (Hoffman & Santomero, 1991). This moderates that when certain measurements are emplaced then tax free withdrawal would be possible. For this to be fully implemented then designated Roth contribution has to be incorporated within the plan for duration of minimal five taxable years.    

Changes on 403(B) over the Last Couple of Years

Over the last couple of years there have been lots of documented changes on the 403(b) plan raging from the way people oversee 403(b) plan to changes that affects employer’s roles. IRS have designed that the 403(b) plan to be structured to perform like the 401(k) plan this was initiated in 2001 after a long period without any alteration or implementation on the 403(b) plan (Seymon-Hirsch & Anderson-Briggs, 2009). These changes are affecting the environment of the employers in the 403(b) and were necessary to iron out major differences which usually arise on the authoritarian matters.

One iron out changes on 403(b) which was structured and implemented on January 1, 2009 was projected toward smaller non-profit employees managing of their own retirement accounts. From the given date hence forth all the employers are required that they cater for the oversight and responsibilities of their employees 403(b) plans. They are also required to overseeing and looking over loans and also the hardship distributions (Canan, 2001).

New Termination Plan

The government instills a new initiative that allows the employer to terminate 403(b) plan scheme using the pool format labeled in the 5500 form. The employer who is the sponsor of this program can be able to terminate this plan through completion of the form which is detailed as follows; (I). The sponsor must have eligible reason for termination. (II). The employer’s are required to have a plan which fosters termination and distribution before hand to facilitate termination. (III). The employer must monitor the successor rule plan which encompasses not making any contribution to 403(b) plan for the following 12 month after termination. (IV). Share out entire cash contribution of 403(b) accounts and mutual fund custodial accounts. (V). The final 5500 form should be filed with DOL. When all this is complied with then the employer would now be able to terminate the 403(b) plan account which this procedures sources to protect both the employee and the sponsor of this initiative (O’Brian, 1998).      

Written Plan Document

For this the entrant is authorized to have a written plan document which the IRS has made it to be mandatory. According to Seymon-Hirsch and Anderson-Briggs (2009) this document outlines the 403(b) material provisions which aims at defining the employers responsibilities, all services providers, plan participants and annuity contract issuer(s) this is when the following issues are to detailed; benefits, loan procedures, contribution limits, hardship withdrawals,  eligibility, distribution nature and timing and contract description from the plan. Throughout the year 2009 all employers are responsible for the supervision, contribution and distribution of the employees plan.

Transferring Assets New Rules

Earlier before major reconstruction on the 403(b) assets transfer rules were enforced, entrants of this plan could easily move 403(b) assets to any investment which has been authorized by the insurer or mutual fund independently within the 90-24 transfer.  This movement was done without the consent of the employers. However, new regulation exemplify that the employers have to be included and they have to grant permission for this transfer. This does not deter ant movement of any investment on the employees from one plan vendor to another, but it only regulates and stabilizes this movement through proper documentation means. This method articulates that the there must be a written documented agreement from the employers which approves of the new investment provider and the new employees approved investment product.  Also these transfers can also be requested by the employee from the original 403(b) program to another 403(b) program which is supported by another qualified employer, this will only occur if the new employer plan can capacitate the terms of the transfer. Through the government defined benefit pension plan an employee holding a 403(b) saving account has the upper hand of transferred which sponsors purchasing of permissive service accredit as noted by Franecki (1998). 

Nondiscriminatory Rules Changes

These changes took effect in December 11, 2008 when it was enlisted that there shall be no discriminatory or favor because of the highly compensated employees considering high employers contribution and the contribution of the employees which occurs after tax (Canan, 2001). The new rules and regulation offered that 403(b) programs which are granted by several schools or approved by religious institution are the cases which maybe exempted from the new changes in the nondiscriminatory regulations.  

Plan Vendors New Requirements

The new requirement which were projected toward the plan vendors, notes that the vendors must be complaints with agreement with the employers as outlined by the new IRS regulations. The vendors are required to support the employees in the calculation of the maximum elective deferrals, also to oversee distribution which capacitate proper income tax reporting and plan applicable loans. The agreement also capacitates sharing of information on the employees account with the employer or any other third party plan overseer. The IRS also developed new contribution limits which are required to be annually at $16,500 for the 403(b) programs also the 50 and older catch up contribution limit was been hiked up to $5,500 and commenced operation on January 2009. There were other plans like the religious sponsored 403(b) plans were offered an extension of up to January 1, 2010 so that they become compatible with these new regulations. This was later this year commenced and maintained in accordance to the IRS requirements. The other which started over last year also was maintained in accordance to the collective agreement of bargaining which commenced regulations on July 26, 2010 (Svaldi, 1995).

Bankruptcy protection

The year 2005 saw the new passage of the bankruptcy reform act which allowed 403(b) to be part of the ERISA plan. This merger allowed the protection of the ERISA (Employee Retirement Income Security Act of 1974) as property status which could be claimed by a debtor under the Bankruptcy Code of the United State (Franecki, 1998). Before this new regulation a certain judge articulated that fixed income annuity can not be considered to be trust and can be accessible to creditors. Variable account are accounted within the 541(c) (2) and through this it was now protected and viewed as trust under the revised bankruptcy laws. Under this new initiatives IRAs, 403(b) accounts and majority of the retirement accounts are all assured of protection from creditors in case of bankruptcy.      

This reasons is the cause of establishing ERISA anti-alienation clause which was the protector of pension before the amendment of the bankruptcy law, this gave the pensioners similar protection as that of spendthrift trust. Many critics speculated that incongruent treatment to the older pension scheme and that there is dire need for more revision to facilitate the proper and just protection. This was the speculations that the congress used to reform the bankruptcy reform in the year 2005 (Everett, 1999).     

Why the Government felt they should make these Changes on 403(b) Plan

One major consideration that the government took heed was from the critics speculation which resulted from the case “re Barnes, 264 B.R. 415.” According to Niendorf and Lang (2000) this was mostly concerned with bankruptcy and trusts on the 403(b) plan account of the pension. The congress saw that it would be best if the bankruptcy would be reformed to protect the right of the pensioners from creditors infiltrating their account in cases of bankruptcy. The new reform verified that the variable account would be protected under section 541(c) (2) of the Bankruptcy Code of the United State.

The beginning of the year 2008 there was recorded a decline of a large scale in the stock market, this also projected toward the retirement plan and individual account balances in 403(b), 401(k) and IRAs plans. The government had to make drastic changes to facilitate this development. This was made through facilitation of the amending of some of the major laws and codes which governs these initiatives. One of the reforms which was injected was regulation set about to stream line the gaps within the 403(b) programs under the Bankruptcy Code section 541(c) (2) and amending and creation of a new section in the Retiree & Employer Recovery Act of 2008 new code section 401(a)(9)(H). The aims were mostly to facilitate the need for reporting and the distributions in the running of the accounts in this retirement programs. This new initiatives also addressed programs termination in the 5500 form as exemplified by Krass (2004).   

The government also articulated that the employers should also have the upper hand in signing agreement with the employees and they should voluntary indulge the employees automatically to the 403(b) plans and also facilitate major transfers from the investment of the employees account. The government under the initiative of the Pension Protection Act of 2006 articulated that this automatic enrollment should serve as a safer option guaranteed to save employers. This is because before this initiative employers were responsible for any losses which may be resulted from automatic enrollment. This act was enforced to protect the employer and offer a safe harbor to them in the form of Qualified Default Investment Alternative (Krass, 2004). Thus this is the alternative investment plan which the employers chooses as the default plan which automatically enrolls employees and guarantees protection from any financial liability that the employees may undergo. Under the department of Labor rules there are three types of investment which qualify as QDIAs this includes balanced fund, managed account and lifestyle funds. QDIAs offer the sponsors with fiduciary relief which is the same as the applied relief which scouts entrant’s investments.   

Benefits of 403(b) Plan

New amendments on the policies that govern 403(b) plan have exemplified that the money saved through this initiative are not taxed. People who are on low tax retirement bracket when their retirement time come they have already paid of their houses and cars, they also are not in the position to pay much of the work related expenses this is if one makes pretax contributions. Thus as many states offer there are exemption on elderly tax payment if the person was on the 403(b) program. 403(b) plan allows Roth contribution and this option unlike traditional IRA they offer tax deduction and the withdrawal made from the Roth portion in the plan this are usually tax free. The 403(b) plan when fostered with Roth contribution then it offers a chance for saving in tax deductions, this initiatives also applies to the 401(k) plan (Svaldi, 1995).

Another exemption on tax payment benefit on the 403(b) plan occurs when one is not required to pay taxes on the interest, dividends and capital gains on the account of this program. Among the other benefit include rebalancing of the portfolio without any deduction expect just the trading fees. This allows one to concentrate on the high returns and low expenses as there are no tax efficiency in the mutual fund that one holds.  

According to O’Brian, B. (1998) another benefit includes taking loans against a 403(b) plan although this depends on the qualification and specification of the plan. This usually comes in handy when one is evaluating on purchasing a house. However, one is advice to first get advice on the consequences of this benefit; this is because usually after the procurement of the desired purchase then the account is left with little saving on the retirement funds. The terms are usually sensitive and one delay on the payment then the person is rendered to have defaulted and IRS deploys penalties.

Another big and this is the main course which this mode of retirement saving is advised is that the employer also chips in same contribution on the employee’s 403(b) plan. This is usually considered free money and thus encourages the entrant to contribute so as t take advantage of the money that the employers assist in the contribution as also they can chip in on pretax basis. Some of the employers would permit their employees to invest in low cost institutional funds which foster high investment minimums. Usually the deals that this plan offers are the best than the one which can be achieved individually. This plan also allows employees to achieve additional contribution which is based on 15 year rule that support long term serving employees with the same employer be provided with additional contributions as noted by Levy (2008).

Challenges of 403(b) Plan to Sponsors

Some of the challenges that are encroached by this program are when terminating of an individual account the procedures of doing these initiatives are not clear. Usually the employers find themselves at logger heads with the law because of flaunting the law unknowingly and they violate the right of the plan account owner. This is because the procedures are not detailed properly and does not administer how distribution should be implemented on a terminated account (Niendorf & Lang, 2000). This irregularities which the IRS are aware of but have been doing nothing about it are referred to DOL for guidance however there are no guidelines that are outlined also concerning how to handle this issue. Here is where now the major challenges apply to the employees as the practitioner device their own instructions to suit themselves. The sponsors usually stand to lose or gain and the result are very tricky.

This fact majority of the employers make their own rules to suit their own terms of the plan. Usually this tends to side and favors them and the employees are discriminated on because of incentives are denied and the distribution are confusing and complicated. Another challenge posed by the 403(b) is the annuity date rules which also poses another dilemma on the starting date rules, whether one should start over or whether they are applied or should reapply (Canan, 2001).

Conclusion

The 403(b) offers various benefits to the account owner raging from retirement benefit to tax exemption on the amount saved on this program. This model of saving for the future is articulated that it is the best as it allows the employer to contribute the same amount that one is saving. The question one should consider is how will I cater for the bills once I have retired? With this in mind then one can be able to enroll in this retirement plan which also helps one develop life for the well being of the future. The new regulation imposed to administer this program is best suited for they protect the interest of both the employers and the employees with the aim that the entrant both benefits. No matter how the challenges may attempt to cloud the glory of this initiative the benefit are rewarding.

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