The IRS has been auditing §403(b) plans for some years now and found that many aspects of these plans were not accessible to their auditors because the §403(b) employers had no control or authority over the accounts held under the §403(b) programs. The new §403(b) regulations are an attempt to remedy this, making it possible for the IRS to audit the loan provisions, hardship distributions, etc. of §403(b) salary deferral plans for the first time.

To accomplish this goal, the Treasury Department has mandated that each employer have a written plan document that spells out the contribution limits, the distribution restrictions, products approved under the plan, and any optional features available under the plan, such as loans, hardship distributions, exchanges, plan-to-plan transfers, and rollovers from other eligible retirement plans.

The insurance companies and mutual fund vendors who currently provide product or investment options to employees will be asked to sign an agreement in which they must agree to provide compliance support in the areas over which they have control. This includes agreement to assist employees in calculating the maximum elective deferrals that each can make to a §403(b) plan; agreement to administer distributions, loans (if applicable) and proper income tax reporting of those distributions. These vendors must also agree to share information on any and all accounts held by them with the plan participant's employer, or any third party the employer might choose for compliance purposes to monitor the qualification of loans, distributions, transfers and exchanges in the plan. Many providers are willing to sign such an agreement; however, it is important to note that employers will most likely eliminate providers who fail to take the responsibility for those items within the provider’s control.

In addition, 90-24 transfers, which in the past allowed §403(b) plan participants to transfer their assets to any §403(b) vendor at will, have been eliminated as of September 24, 2007. In their place, exchanges may be available if the vendor has entered into an information-sharing exchange agreement similar to the one signed by approved vendors. If you want to make a change in your §403(b) vendor at any time between now and January 1, 2009, you must first find out if the vendor you have chosen can obtain an exchange agreement from your employer. A transfer or exchange executed without an exchange agreement in place could subject you to tax liability on the dollar amount of the transfer/exchange. It is in your best interests to make sure the vendor you have picked has an exchange agreement with your employer.

For further details specific to your §403(b) account, contact your employer and/or the vendor.