1. Employee Benefit Consulting 403(b) Arrangements Assessing the changes Planning for the future Michigan Community College Business Officers Association 403(b) Arrangements Assessing the changes Planning for the future Michigan Community College Business Officers Association November 2, 2006 Aaron Prince(248) 375-7453 Bruce Delbecq, CPA (248) 375-7276

2. Employee Benefit Consulting 2 Summary of Session Topics  Review of Proposed 403(b) Regulations  What is Required  What is New  Implementation Considerations  Documentation  Vendor Management  Other Practices/Considerations  Q&A and Feedback

3. Employee Benefit Consulting 3 Review of Proposed 403(b) Regulations  Proposed 403(b) Regulations were issued late in 2004 – the first comprehensive guidance relating to 403(b) plans in over 40 years!  They may not be relied upon until finalized:  Initial target effective date of January 1, 2006  Final regulations are expected late in 2006 or very early 2007  IRS has since indicated will generally not be effective earlier than January 1, 2008  Most practitioners anticipate Final Regulations to be very similar to the Proposed Regulations

4. Employee Benefit Consulting 4 Review of Proposed 403(b) Regulations  General “theme” of the Proposed Regulations is to bring 403(b) requirements closer to those of 401(k) and eligible 457(b) plans.  What does that mean?  Likely more employer involvement  Increased administrative responsibility for employers  Previously almost entirely placed on vendor(s)  Unclear as to what day-to-day changes will occur  Potentially less flexibility for participants

5. Employee Benefit Consulting 5 Review of Proposed 403(b) Regulations What is Required?  Written Plan Document  Previously no requirement to have, or operate plan in accordance with, a plan document  Elimination of Incidental Life Insurance Benefits  After February 14, 2005 (90 days after publication of Proposed Regulations) no longer permitted as a plan component  Certain contracts issued prior to February 14, 2005 are grandfathered

6. Employee Benefit Consulting 6 Review of Proposed 403(b) Regulations What is Required?  Universal Availability Rule  IRS is emphasizing compliance with this rule!  Provides that salary deferral contributions must be offered and publicized to all employees (meaningful notice must be given)  Exceptions:  Certain student employees  Employees eligible for a 401(k)/457(b) of employer  Employees normally working < 20 hours/week

7. Employee Benefit Consulting 7 Review of Proposed 403(b) Regulations What is Required?  Universal Availability Rule (continued)  Exception for employees normally working < 20 hours per week is only valid if:  Reasonably expected that employee would work < 1,000 hours for first 12 month period; and  For subsequent years, employee worked < 1,000 hours  Employees need not enter the plan on their date of hire  Reasonable entry should suffice (e.g., monthly)

8. Employee Benefit Consulting 8 Review of Proposed 403(b) Regulations What is New?  Written Plan Document Requirement  What constitutes a written document?  Must be satisfied in form and operation  Must administer plan in accordance with the terms of the written document

9. Employee Benefit Consulting 9 Review of Proposed 403(b) Regulations What is New?  Roth 403(b)  First permitted after January 1, 2006  Plan may offer Roth contribution option (must still provide for pre-tax contributions to be made  Similar to Roth IRA, after-tax contributions made and tax-free distributions (if certain requirements met)  Additional guidance anticipated

10. Employee Benefit Consulting 10 Review of Proposed 403(b) Regulations What is New?  Employers may now Transfer Plan Assets between 403(b) vendors  Timing of elective contribution deposits  Do not need employee authorization/consent  Employee initiated transfers permitted only among employer authorized contracts and agreements  Will still be okay to transfer to MPSERS to purchase service credit, if plan allows

11. Employee Benefit Consulting 11 Review of Proposed 403(b) Regulations What is New?  Plan Termination  Written plan document may allow for termination of the plan and distribution of assets to employees  Uncertain how investment penalties will be handled  Regulations require that “accumulated benefits” must be the same after transfer as before  Ordering of Catch-Up Contributions (traditional/Age 50)  Traditional Catch-Up utilized first  Important since cumulative contributions under the traditional catch-up are limited to $15,000

12. Employee Benefit Consulting 12 Review of Proposed 403(b) Regulations What is New?  Employer non-elective contributions may be made to a 403(b) plan on behalf of a participant for up to 5 years after employment termination. Equal to the lesser of: i) employee’s last 12 months of compensation or ii) annual dollar limit in effect for each year.  Changes to withdrawal restrictions on employer contributions

13. Employee Benefit Consulting 13 Review of Proposed 403(b) Regulations What is New?  Compensation after severance - 2½ months – can make elective deferrals from this “post-severance compensation”  FICA regulations clarified the definition of a salary reduction agreement for FICA tax purposes – only payments under or to a 403(b) annuity made by reason of a salary reduction agreement are considered wages for FICA tax purposes

14. Employee Benefit Consulting 14 Implementation Considerations  Most community colleges will be unwilling/unable to change the overall 403(b) vendor structure  ERISA considerations – by analogy  Colleges will likely take the following steps:  Prune Vendors  Assess participant satisfaction with vendors  Assess participation levels with each vendor currently in place  Prune vendors - start now

15. Employee Benefit Consulting 15 Implementation Considerations  Consider issues/opportunities related to new rules  Attempt to maintain one plan document  IRS has indicated it will publish model language (not model document). Probably in Spring of 2007  Worth waiting for – vendors will have trouble saying no to IRS model language  Invoke a comprehensive vendor agreement  Consider current solicitation policy and making any modifications

16. Employee Benefit Consulting 16 Implementation Considerations Documentation  Aim for one plan document  No two documents will have the same provisions  Keep differences between vendors to a minimum to minimize errors and confusion

17. Employee Benefit Consulting 17 Implementation Considerations Vendor Management  Spell out the responsibilities of the parties  Document actions that in the 401(k) world are the employer’s responsibility, but will be shifted, in whole or in part, to the vendor  Address how non-compliance will be handled  Areas where vendors will look for more employer involvement  Determining employee eligibility  Ensuring timely forwarding of participant contributions  Contribution limitations  Approving vendor to vendor transfers  Approval of distribution requests – termination, age 59½, hardship QDRO’s

18. Employee Benefit Consulting 18 Implementation Considerations Vendor Management AREAS OF CONCERN  Performance/cost of investment products  Deferred sales charges  Quality and independence of investment education and investment advice  Stability of administrators/investment managers/annuity custodial account providers  Plan loans-repayment and default  Correction of mistakes

19. Employee Benefit Consulting 19 Implementation Considerations Other Practices/Considerations  Reassess eligible 457 plan management and administration in light of 403(b) changes  Deposit of salary deferred contributions – As soon as administratively feasible, but not later than 15 business days – the ERISA standard that Colleges should adhere to  Plan document and operational defects – the Employee Plans Compliance Resolution System (EPCRS)

20. Employee Benefit Consulting 20 Question & Answer Session Questions?

21. Employee Benefit Consulting 21 Plante & Moran, PLLC Employee Benefits Consulting Group Thank you! Aaron Prince aaron.prince@plantemoran.com (248) 375-7453aaron.prince@plantemoran.com Bruce Delbecq, CPA bruce.delbecq@plantemoran.com (248) 375-7276bruce.delbecq@plantemoran.com 2601 Cambridge Court, Suite 500 Auburn Hills, MI 48326