June 26, 2008
New law impacting 403(b) plans sponsored by Minnesota school districts.
What We Already Know. On July 23, 2007, the Internal Revenue Service (“IRS”) issued the final 403(b) regulations (“Final Regulations”). The Final Regulations replace the original regulations which were issued in 1964, and generally apply to taxable years beginning after December 31, 2008.
Note: The Final Regulations permit a delayed effective date for 403(b) plans which are maintained pursuant to a collective bargaining agreement that was in effect on July 26, 2007. Such plans must comply with the Final Regulations by the earlier of: (1) July 26, 2010, or (2) the date on which the last of the collective bargaining agreements terminates (determined without regard to any extension thereof effective after July 26, 2007).
What We Need to Know. In Minnesota, there is a new wrinkle. The Minnesota legislature, during its recently concluded session, passed a law significantly impacting the design and administration of 403(b) plans sponsored by school districts in Minnesota. The effective date of the State law is August 1, 2008.
What We Need to Do. School districts must comply with both the federal requirements and the new state requirements. You need to decide how you are going to comply with both the Final Regulations and the Minnesota requirements. A school district can satisfy the Final Regulations requirements prior to the effective date of the new Minnesota legislation. This offers the school district the advantage of appropriately exercising due diligence over the review and selection of the vendors, the opportunity to make plan design changes, and the opportunity to control administration costs. Because compliance with the Final Regulations would be accomplished prior to the effective date of the new Minnesota requirement to bargain, the school district can do this without bargaining.
Note: This is consistent with the way many school districts have approached compliance with the Final Regulations. They do so by having an advisory committee of various impacted employee groups.
The Minnesota Law Change
The Substance of the Change. At the urging of Education Minnesota, Section 123B.02, subdivision 15, of the Minnesota Statutes has been amended to provide that the identity and number of 403(b) investment vehicle vendors is a “term and condition of employment” for purposes of Section 179A.03 of the Minnesota Statutes. Under Section 179A.03, employers are required to meet and negotiate with each bargaining unit with respect to all “terms and conditions of employment.” Therefore, as of August 1, 2008, school districts will be required to meet and negotiate regarding the number and identity of the investment vendors to whom contributions may be made under their 403(b) plans.
What the Change Means. For collective bargaining agreements renewing on or after August 1, 2008, school districts will have to negotiate the identity and number of 403(b) vendors with the bargaining unit.
The Final Regulations
The Substance. Under the Final Regulations, employers sponsoring 403(b) plans are required to do a number of things, including adopting written plan documents reflecting their 403(b) plans. The written plan document must identify the investment vehicles (including the vendors of the investment vehicles) available under the plan. In general, the Final Regulations are effective January 1, 2009. A written plan document must be adopted prior to the effective date of the Final Regulations. To comply with the Final Regulations, most school districts, therefore, will be required to select approved vendors (at least with respect to the non-bargained employees) prior to January 1, 2009.
Compliance with Both
As noted above, school districts must comply with both the Final Regulations and Minnesota law. Because of the different required dates of compliance, school districts have several approaches from which to choose:
- Determine vendors (number and identity) and adopt a written plan document identifying those approved vendors prior to August 1, 2008. This approach provides the school district with the best ability to comply with the Final Regulations and not be out of compliance with the new Minnesota requirement. The Final Regulations requirements will be satisfied prior to the required date of January 1, 2009. The Minnesota requirement to bargain will not yet be effective. With respect to future changes to the number and identity of vendors, those changes will need to be negotiated under the Minnesota requirement.
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Determine vendors (number and identity) through bargaining and adopt a written plan document prior to January 1, 2009, but after August 1, 2008. By following this approach, the school district is able to comply with both sets of requirements. The Final Regulations will be timely satisfied by January 1, 2009. Because the Minnesota requirement will be in effect, the requirements regarding bargaining with each bargaining unit will have to be met.
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Adopt a written plan document prior to January 1, 2009, reflecting the existing list of approved vendors and adjust the list of approved vendors coincident with the next round of negotiations. By following this approach, the school district can comply with the portion of the Final Regulations regarding the written plan document, suggesting at least superficial compliance. However, the other responsibilities of the school district under the Final Regulations may not have been satisfied. In addition, regarding vendor changes, future changes to the vendor list will have to be negotiated with each bargaining unit.
Important: This approach allows the school district the maximum flexibility and control over establishing the floor from which future bargaining will take place.
Please let us know if you would like to discuss these issues or would like assistance drafting an amendment to your plan.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.