| IRS Acts To Restrict "Provider to Provider" Transfers of 403(b) Funds |
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Dear Members, I am sending you portions of a NYSUT alert that coincides with the letter you received from Mr. Johnston, the business liaison for the District. I am hoping to calm fears, provide some explanation and assure you the NRTA is abreast of the details to this new tax law. This is a Federal implementation and your union is working diligently to protect and inform each and every member nationally. IRS ACTS TO RESTRICT "PROVIDER TO PROVIDER" TRANSFERS OF 403(b) FUNDS Background: The 403(b) world has recently been thrown into turmoil following the issuance of the final 403(b) regulations on July 26, 2007. Much of this turmoil is due to confusion surrounding the transition rules buried in the regulations. The new 403(b) regulations apply, not only to school districts sponsoring 403(b) plans, but nationally to all non-profit organizations that can legally sponsor 403(b) plans for their employees. Transitional Rules Explained: Contained within the hundreds of pages of the IRS regulations is an interim provision that has been interpreted by plan sponsors (school district employers), financial services companies and 403(b) plan administrators as, in effect, requiring a suspension of the exchange or transfer of funds between your school district's various 403(b) providers, from September 25, 2007 forward. Despite the regulations' general January 1, 2009 effective date, the regulation adopted by the IRS only permits the transfer or exchanges of 403(b) funds between a school district's offered 403(b) providers on or after September 25, 2007, provided that the financial services company that is the recipient of those exchanged or transferred funds agrees to timely and properly meet the administrative requirements of the new regulations by January 1, 2009 (sixteen (16) months from now). Effectively, this means that the recipient 403(b) contract or account would have to be among the 403(b) investment options offered by the plan sponsor (school district) sixteen (16) months from now, on January 1, 2009. The IRS has recently publicly stated that if there are transfers or exchanges of funds on or after September 25, 2007 that do not fulfill these essential (future) pre-conditions by January 1, 2009, there are no assurances that the previous transfer or exchange will be treated as tax-deferred by the IRS. Transition Rules Only Apply to Transfers or Exchanges Between Different Financial Providers: The September 24, 2007 deadline only applies to transfers or exchanges between or among investment providers that the school district, as plan sponsor, offers. The subject interim regulation does not have any impact on the transfer of funds by a school employee that are made by the employee within the array of mutual funds of any given investment provider in which the employee currently participates. Awaiting Further Clarity From IRS: The Trust has been informed by its consultants that the full impact of these transitional rules was not fully appreciated by IRS officials when they were promulgated, and that the IRS did not anticipate the considerable confusion they would generate throughout the 403(b) community. Presently there are proposals before the IRS seeking both relief from, and clarity to, these transition rules. While some response is expected from the IRS, it will most likely not be issued until sometime after September 24, 2007. In order not to jeopardize the tax-deferred status of an employee's/participant's 403(b) savings, there would be a temporary "hold" on requests to transfer or exchange funds between providers offered in their 403(b) plan. Some financial services companies are permitting contract transfers and exchanges after September 24, 2007 only if the school district 403(b) sponsor executes an agreement with the company that the district will cooperate in administering the contract in accordance with the final regulations by January 1, 2009. However, there are no assurances that the financial services company offering this option will be ultimately selected and remain in place as among the investment options offered by the school districts in January 2009. Future Developments: NYSUT Member Benefits Trust is monitoring all updates and remedial measures that are awaiting decision by the IRS regarding the 403(b) transitional rules. As soon as additional information becomes available an updated NYSUT Member Benefits Trust Alert will be posted. Disclosure: NYSUT Member Benefits Trust does not provide investment, legal or tax advice, and the information contained in this informational bulletin should not be construed as such. NYSUT Member Benefits Trust encourages members to seek guidance from their own investment, financial, legal and tax advisers. In Solidarity, Robin Brennan |