Alert: New Rules for School Retirement Fund Transfers Take Effect Sept. 25, 2007

The IRS has issued new regulations governing 403(b) retirement plans that will have significant consequences for school superintendents. For the first time, superintendents are responsible for administering public school systems’ qualified savings plans. This document summarizes an important issue established by the new IRS regulations. Under the new regulations, a significant change in the rules governing the transfer of 403(b) money will take effect Sept. 25, 2007.  Failure to comply with this rule change may result in adverse tax consequences for retirement plan participants.

New Transfer Rules
Under the current IRS regulations, employees may transfer funds from one 403(b) retirement plan provider to another. This exchange of funds is called a 90-24 transfer. Under the new IRS regulations, 90-24 transfers are not permitted after Sept. 24, 2007. While 90-24 transfers may continue until Sept. 24, 2007 — as long as they are made in compliance with current law — after Sept. 24, 2007, the rules change. For transfers after Sept. 24, 2007, school districts have two options:

  • School districts can decide not to allow transfers until they have a 403(b) written plan in place. Under the new regulations, school districts are required to create a written plan by Dec. 31, 2008, that includes information about how they will treat transfers.

  • School districts can enter into an information-sharing agreement with a 403(b) plan provider by Jan. 1, 2009. The agreement may allow the district to permit transfers. It is not clear at this point what information a plan provider and a school district will be required to share. However, they will likely be required to share enough information to ensure that 403(b) requirements are met, including:
    • information concerning the participant’s employment or severance;
    • information taking into account other section 403(b) contracts or qualified employer plans, such as information necessary to determine compliance with applicable hardship distribution requirements; and
    • information necessary to satisfy other tax requirements, including whether a loan from the plan satisfies the applicable provision of the Internal Revenue Code.

School districts should seek legal and tax advice before entering into any agreements on transfers.

The AASA Center for System Leadership is developing a toolkit to help school leaders effectively implement the new IRS regulations. The toolkit, Blueprints: A Guide to Public School Plans 403(b) and 457(b), will provide easy-to-use tools and IRS materials to assist school leaders in understanding what is required to comply with the regulations. AASA will mail the toolkit to every school superintendent in the country in November 2007.

Disclosure: This information is provided as information only and is not intended to be used to avoid tax penalties or to render tax or legal advice. The taxpayer should seek advice from an independent tax advisor. Neither AASA nor AASA employees or contractors offer legal or tax advice.

Sponsored by Horace Mann Companies, AXA Equitable, ING and AIG VALIC.