403(b) Plan: Eligibility Requirements
- A tax-exempt organization established under section 501(c)(3) of the Internal Revenue Code - these organizations (see note below) are usually referred to as section 501(c)(3) organizations
- Public school systems
- Cooperative hospital service organizations
- Uniformed Services University of the Health Sciences (USUHS)
- Public school systems organized by Native American tribal governments
- Certain ministers
An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes: charity, religion, education, science, literacy, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. To qualify, the organization must be a corporation, community chest, fund or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify. (For background reading on this type of plan, check out The 4-1-1 On 403(b) Plans and The Top 9 Benefits Of A 403(b) Plan.)
Who May Participate in a 403(b) Plan?
Employees of the above list of employers may participate in the 403(b) plan maintained by the organization.
How is a 403(b) Plan Established?
An employer must adopt a "written plan", which defines the terms of the 403(b) plan. The written plan serves to facilitate the allocation of plan responsibilities among :
- The employer,
- The issuer of the 403(b) account or annuity, and
- Any other parties involved in implementing the plan.
The written plan also provides a central document, or collection of documents, which explains the rights of the employees and employee eligibility for participating in the plan, and enables government agencies to determine whether the plan satisfies applicable laws.
If the plan allocates responsibilities for performing administrative functions to other parties, such allocation must identify who is responsible for ensuring compliance with the requirements of the tax code, including compliance requirements for loans and distributions.
In the case of a plan that is funded through multiple financial institutions, the employer may adopt a single written plan to coordinate administration among the financial institutions, rather than having a separate document for each issuer.
Written Plan Language
The IRS Issued Revenue Procedure 2007-71, which provides model language that may be used by public schools to adopt a written plan to reflect the requirements as defined under the 403(b) rules and regulations. If the public school adopts the language word for word or uses language that is "substantially similar" and does not materially change the provisions of the model language, the written plan will not require further approval from the IRS. If material changes are made to the language, the school should apply for a private letter ruling from the IRS in order to ensure that the changes are consistent with the provisions of the 403(b) rules and regulations.
The model language is intended for a basic plan under which contributions are limited to pretax elective deferrals. This does not include plans that allow Roth 403(b) contributions, employer matching, or employer nonelective contributions.
Other entities may use the language provided in the Revenue Procedure. However, these entitles should apply to the IRS for approval in order to have assurance that the plan is in compliance with regulatory requirements.
Establishing Accounts Under the Plan
The employer must notify employees of the plan's existence, their eligibility requirements for participating in the plan and provide a list of financial institutions with which they can establish their 403(b) accounts.
The financial institution with which the employee chooses to establish his or her 403(b) account must provide the required documentation for establishing the account to the employee. For instance, a custodian would provide the employee with a 403(b)(7) Custodial Account Agreement, while an annuity company would provide the employee with an annuity contract.
The employee should provide the employer with information about his or her account, such as the account number and the financial institution with which the account is established. This allows the employer to send plan contributions to the employee's account and coordinate administrative functions with the financial institution.
Coordination of Data
The employer or designated plan administrator must coordinate the sharing of data for employees' 403(b) accounts, so as to ensure compliance with 403(b) rules, such as :
- Tax reporting requirements
- Ensuring loan limitations are adhered to, and
- Ensuring that withdrawals meet the requirements of the account agreement and written plan.
Coordination of data also ensures that statutory limitations are adhered to in cases where an employee may have multiple 403(b) accounts.403(b) Plan: Contributions
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