January 3, 2009
Schoolteachers, college professors and hospital employees should keep an eye out for changes in their retirement plans this year. That’s because they are among the 10 million workers at nonprofit and educational organizations who may face fewer investment choices and tighter restrictions on how they can use the money in their retirement plans because of new IRS rules.
The IRS is requiring retirement plans designed for tax-exempt nonprofit groups and some public sector workers — called 403(b) plans after the IRS code section that created them — to comply with stricter rules. The IRS has allowed such plans to operate with less oversight than their for-profit world counterpart, the 401(k), for the last 40 years.
It’s a significant development because employers, which include school districts, religious groups and nonprofits with lean staffing, must take a more active role in managing their retirement plans. The 403(b) market held more than $670 billion in assets as of mid-2008, according to estimates compiled by Windsor, Conn.-based LIMRA International, a research and consulting company.
Organizations have had a little more than a year to figure out what to do. That may seem to be plenty of time, but 12,000 school districts and hundreds of thousands of tax-exempt nonprofit groups don’t have trained full-time benefit managers to oversee their retirement plans, said Kevin Watt, vice president of business development for Topeka, Kan.-based Security Benefit Corp.
The IRS has backed off of implementation slightly by saying organizations can delay filing a detailed retirement plan until Jan. 1, 2010, but they must still comply with the new regulations.Failure to comply could result in loss of tax-deferred status, causing the employees in the plan to be responsible for paying taxes on the money in the funds.
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