403(b) Plan FAQ

How is a 403(b) Plan funded?
Who can set up and benefit from a 403(b) Plan?
What is the difference between Title I vs. Non-Title I Plans?
How can I establish a Title I 403(b) Plan?
How can I establish a Non-Title I 403(b) Plan?
May I take a distribution from my 403b Plan?
What about direct rollovers and transfers?
What tax reporting will need to be done and who will do it?

How is a 403(b) Plan funded? A 403(b) plan is funded through a voluntary salary reduction agreement between participants and the plan sponsoring organization. Participants elect how much they want to contribute to their account and how often, subject to certain IRS limits. The contributions are deducted from a participant’s paycheck on a before tax basis and deposited to the participant’s designated account. In a typical 403(b) program, the employee selects the investments for their plan, usually from a designated list of investment providers. The employee can, subject to any limitations in the account or contract, change funding vehicles and move assets between different accounts or contracts. Obviously, allowing employees to move assets between funding vehicles can present administrative challenges for the employer. Conceivably, each employee could be using a different investment provider and, thus, the employer may be sending funds to dozens or even hundreds of different investment providers. Many employers limit the number of investment provider’s employees may use to minimize the administrative burden. Under this method, employees are required to select an account or contract from among the vendors on a list approved by the employer. Salary deferrals will only be sent to approved providers limiting the investment options of the employees. The Department of Labor (DOL) takes the position that if the employer unduly restricts the employees’ investment options, this may cause the plan to become subject to Title I of ERISA. However, this restriction does not necessarily render the plan subject to Title I of ERISA, because following the initial investment, the employee is free to move their 403(b) dollars to other funding vehicles. With a Sterling Trust 403(b), the burden of sending salary deferrals to numerous different investment providers is removed from the employer. The employer will simply send all deferrals to Sterling Trust who in turn will make all investments according to existing participant elections. In addition, Sterling Trust can provide plan administration and record keeping services for 403(b) plans. Back to Questions   Who can set up and benefit from a 403(b)? The 403(b) market is composed of five distinct segments. The market segments of 403(b) are: Public Elementary/Secondary Schools Private Elementary/Secondary Schools Colleges and Universities Healthcare Charitable/Religious/Other Non-Profit Institutions Back to Questions   What is the difference between Title I vs. Non-Title I Plans? In general, a 403(b) plan which allows for employer matching or other employer contributions in addition to employee elective deferrals is sometimes called a Title I plan since such a plan may be subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Title I plans may be classified as institutional when they contain the following characteristics: Subject to ERISA and non-discrimination rules Employer contributions are made A single provider/administrator is used Plans that are funded exclusively with employee elective deferrals are sometimes referred to as Non-Title I plans. Non-Title I plans may be classified as Voluntary when they contain the following characteristics: Not subject to ERISA and discrimination testing No employer contributions Multiple providers   Back to Questions    How can I establish a Title I 403(b) Plan? Establishing a Title I 403(b) plan is similar to the qualified plan establishment process. In addition to the governing body resolutions and the business office support, the Title I 403(b) plan requires a plan document to be executed by the employer. Often, summary plan descriptions must be distributed to individuals. The Title I 403(b) plan may call for discretionary (similar to profit sharing) employer contributions or matching contributions (which must pass the IRC Sec. 401(m) test). Employer contribution allocations can be based on elements other than compensation (e.g., years of service). Various anti-discrimination tests generally must be passed. Back to Questions   How can I establish a Non-Title I 403(b) Plan? The setup process for a deferral only 403(b) plan is simple. Normally, the following process is used. The employer’s governing body passes a resolution authorizing the 403(b) plan. The governing body authorizes investment providers and/or identifies one or more individuals to prescribe operational and investment rules. The payroll processing capabilities are reviewed to insure the deduction and remittance process can be handled. Employees are notified of the 403(b) plan. Employees select among various investment providers and sign a 403(b) arrangement or account. Employees notify the business office of their deferral election decisions with the requisite election form. The amounts are deducted from paychecks and are remitted to the investment provider. Back to Questions May I take a distribution from my 403(b) Plan? Amounts cannot be distributed from a 403(b) plan before the occurrence of one of the following triggering events: · Age 59½ · Death · Disability · Separation from Service · Hardship If the employee’s pre-1989 balance has been tracked separately, the employee may take advantage of a special transition rule. The transition rule allows pre-1989 balances to be distributed at any time without the regard to the availability of a triggering event. Distributions prior to age 59½ are generally subject to a 10% penalty on that portion of the distribution, which is included in income. The following are exceptions to the 10% penalty:   · Death · Disability · Separation from Service after reaching age 55 · Distributions to an alternate payee under QDRO · Distributions for deductible medical expenses · Certain substantially equal periodic payments The required minimum distribution (RMD) under a 403(b) plan is generally similar to the RMD rules for qualified plans and IRAs. However, special rules are available for church employees and pre-1987 balance rules. The special church employee rule calls for RMDs to begin by the later of the age 70½ year or the year that the individual retires. Under the IRC Sec. 403(b) rules, any amount attributed to an employee’s pre-1987 balance is not considered when calculating the RMD. Thus, if an employee has a year-end balance of $100,000 and a pre-1987 balance of $60,000, the balance for RMD purposes is $40,000. However, any amount distributed from the 403(b) arrangement in excess of the RMD is deemed to come from the pre-1987 amounts. An IRS Private Letter Ruling indicates that pre-1987 balances must commence to be distributed by the year the individual attains age 75. Back to Questions What about direct rollovers and transfers? With the passage of the Unemployment Compensation Amendments of 1992 (UCA-92), the direct rollover option became available with a distribution from a 403(b) plan. Most distributions from a 403(b) plan, unless directly rolled over, are subject to the mandatory 20% income tax withholding. If amounts are directly rolled to another 403(b) arrangement or to an IRA, the 20% withholding is avoided. Sterling Trust also can also provide your Rollover IRA if you later have a need to leave the 403(b) plan. The IRS allows for transfers between 403(b) arrangements pursuant to the rules found in the Revenue Ruling (Rev. Rul.) 90-24. Prior to the issue of this ruling, it was unclear if such a transfer was permissible or of the tax consequences if such a transaction occurred. The release of Rev. Rul. 90-24 helped the 403(b) market to become significantly more competitive. Back to Questions   What tax reporting will need to be done and who will do it? IRS Form W-2 The employer must indicate that an employee is participating in a 403(b) plan on the employee’s W-2 form by stating the amount of the employee’s deferrals along with a code (Code E) that indicates that the deferrals are being made into a 403(b).   The employer must also check the “Pension plan” box on the W-2. The employee’s IRA deduction may be limited because they are considered to be a participant in an employer-sponsored plan. IRS Form 1099-R The payer of a distribution from a 403(b) plan must issue IRS Form 1099-R to the recipient and the IRS. As in the case with IRAs and qualified retirement plans, the 1099-R is due to the recipient by January 31st and to the IRS by February 28th of the year following the distribution. The distribution codes for 403(b) are identical to the qualified plan codes.   Sterling Trust will issue the 1099-R. Back to Questions