Get Ready for New IRS Rules

Section 409A–Deferred Compensation

Deferred compensation is defined as any arrangement that provides for the payment of compensation in a calendar year later than the year in which the compensation was earned. This interpretation affects many types of compensation. Most notably for school districts, it affects 10-month employees who are paid on an annualized basis or who take lump-sum payoffs when they resign at the end of a school year.

The new IRS rules require that a deferred compensation arrangement provide strict definitions of the form (e.g. lump sum or installments) and the time of the distributions to be made at the time the arrangement is established. If the district wants to offer employees a choice of how they want to be paid, then documentation is more complex; each employee must sign an election form before their employment for the school year begins. If the district makes a unilateral decision to pay employees over 12 months, the process is much easier. Districts need only provide all employees with a clear notice of the payment arrangement before the school year begins.

TASB will provide sample notices for districts that choose to unilaterally annualize payments. For contract employees, this notice is included in the new TASB model employment contracts that were posted online in HR Services’ Member Library and sent to subscribers in January.

5.2. Annualized Salary. If the Employee will work on a less-than-12-month basis, the Employee’s salary will be paid on an annualized basis. The District will make deductions from each paycheck for income tax withholding and benefits.

To ensure that employees without contracts also receive notice, another notice will be included in local policy DEA (Salaries, Wages, and Stipends) and the Model Employee Handbook from HR Services. The policy will be distributed in Update 83 in early summer and the updated handbook will be released in May.

Section 403 (b)–Tax-sheltered Annuity Plans

Final 403(b) rules are effective as of January 1, 2009. These rules provide comprehensive guidance about the employer’s responsibility to provide oversight of 403(b) plans. They apply to all types of 403(b) plans, including those which receive only employee salary deferral contributions.  The Teacher Retirement System of Texas now vets and certifies all 403(b) companies that can do business in Texas schools. But there are other new responsibilities in the rules that apply directly to the employer.

Districts must adopt a written plan document by December 31, 2008. The plan document includes issues such as eligibility rules, benefits available, contracts, responsibilities, loan requirements, and participant rights and responsibilities. Employers can no longer delegate plan administration responsibilities to the participants.

Universal availability is an important new requirement that needs district attention.  Employers must now offer the opportunity to make salary deferrals to a 403(b) plan to all employees.  The only exclusions permitted are employees who normally work less than 20 hours per week or those who are not willing to contribute at least $200 per year. 

Universal availability is likely to become a target for IRS compliance reviews. Not only must employers offer universal availability, they must also provide a “meaningful notice” to all eligible employees at least once a year to advise them of the availability of the 403(b) plan and how to participate.

The new rules are complex and offer the first comprehensive guidance for 403(b) arrangements in more than 40 years. The good news is that excellent help for school administrators is available through the Texas Association of School Business Officials which has a direct link on its Web site to a 403(b) Resource Center developed by association’s national organization. The Resource Center has written plan documents and notices, clear explanations of the new rules, and a complete compliance action plan checklist and timeline.