by Marshall Cobb

Many recent articles have described how 403(b) plans will be made simpler due to new rules set to take effect in January of 2009. It's actually quite the opposite - 403(b) plans are about to become even more complicated.

Unless you have worked for a school, hospital or church you may not even be familiar with 403(b) plans. For lack of a better way to describe them, they are the equivalent of a 401(k) plan for those that work in the not-for-profit sector.

Insurance companies have long dominated this little corner of the retirement marketplace and its due in no small part to their lobbying efforts that 403(b)s have long been viewed as quirky, expensive and difficult. Keep in mind that until the passage of ERISA it was illegal to offer a non-insurance-based product (such as a mutual fund) within a 403(b).

Other long standing quirks include the fact that, unlike 401(k) plans, many 403(b) plans are technically not plans and, even more technically, don't fall under the body of law that governs the rest of the retirement arena: ERISA. Participants in a 403(b) may or may not actually be part of a plan covered by ERISA depending on whether or not their employer makes a contribution and, for reasons that will have to be expanded upon elsewhere, the type of not-for-profit organization that sponsors the plan.

The new rules do attempt to add some clarity to these murky waters by requiring 403(b) plans to have a written plan document. However, at this time the IRS has no model plan document. The biggest complication here is that, unlike 401(k) plans, 403(b) plans often allow multiple vendors to have access to their participants. Instead of having a menu supported by one vendor, such as Fidelity, a 403(b) participant may be able to make contributions to Fidelity, VALIC, TIAA-CREF and many other vendors active in that marketplace. Each of these vendors has their own agreement and contract with unique provisions. The new plan document is required to encompass all of the provisions from all of the various vendors. Is there a benefits attorney in the house?

Participants have also long had the ability to transfer assets tax-free between 403(b) plans under what is known as IRS Revenue Rule 90-24. These transfers could take place regardless of the benefits and distribution requirements under either plan involved in the exchange. The new rules complicate this process by stating that, effective September 24, 2007, employers are required to ensure that the distribution provisions of the plan/vendor receiving the transfer are at least as stringent as the plan/contract where the assets currently reside. If you think that sounds complicated, try finding all of these terms within even one annuity contract.

Even the termination of a plan has taken a turn for the complicated in the new regulations. Prior to the new law, there was no way to terminate a 403(b) plan. This was a particular pain to those who wished to terminate their 403(b) plan and establish a 401(k) plan in its place. Without the assets from the terminated 403(b) plan the employer would have to start a brand new 401(k) -- many vendors won't offer their 401(k) product to a "start-up" plan and those that do charge a premium. So, in the past the option was to have a frozen 403(b) and a brand new 401(k). Employees would have accounts in both plans and no one was happy.

The new rules allow the 403(b) to be terminated but require that all assets be paid out directly to the participants. Employers can't take the existing assets of the 403(b) and transfer them to a new 403(b) or 401(k) - though this is common practice in the for-profit arena where assets from a terminated 401(k) or profit sharing plan can be transferred to a new plan. Courtesy of the lobbying efforts of the insurance industry, the preferred method of payment of plan assets from a terminated plan will be: an individual annuity. In this instance I suppose the new regulations have at least kept the status quo as no one is happy with these terms besides the insurance companies.

Confused? These points are just the start of a long list of confusing elements of 403(b) plans. Because of the new legislation this list is growing longer, not shorter.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb's first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his virtual office -- based near Houston, Texas -- with employees and clients across the country.