Pension Protection Act Blog

The debate continues on whether the IRS requires 403(b) plans to be expressed on a written plan document. The latest statement from the IRS on this issue is contained in the new final regulations released today.

With these Final Regulations, effective November 15, 2007, the IRS added Treasury Reg. section 31.3121(a)(5)-2 containing the definition of Salary Reduction Agreement for purposes of Internal Revenue Code section 3121(a)(5)(D). The preamble to the regulation also provides 11 pages of guidance addressing comments received and applicable court cases. This regulation is directed at public educational institutions and 501(c)(3) organizations which purchase annuity contracts described in 403(b) on behalf of their employees. It states:

(a) Salary reduction agreement defined. For purposes of section 3121(a)(5)(D), the term salary reduction agreement means a plan or arrangement (whether evidenced by a written instrument or otherwise) whereby payment will be made by an employer, on behalf of an employee or his or her beneficiary, under or to an annuity contract described in section 403(b) –
(1) If the employee elects to reduce his or her compensation pursuant to a cash or deferred election as defined at section 1.401(k)-1(a)(3) of this chapter;
(2) if the employee elects to reduce his or her compensation pursuant to a one-time irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement (or pursuant to a similar arrangement involving a one-time irrevocable election); or
(3) if the employee agrees as a condition of employment (whether such condition is set by statute, contract, or otherwise) to make a contribution that reduces his or her compensation.

(emphasis added)(hat tip to BenefitsLink.com)

The proposed version of these regulations was published by the IRS on December 6, 2004. A copy is available here.

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