Aaron Prince (248) 375-7453 Bruce Delbecq, CPA (248) 375-7276

1. Aaron Prince (248) 375-7453 Bruce Delbecq, CPA (248) 375-7276 403(b) ArrangementsAssessing the changes Planning for the futureMichigan Community College Business Officers AssociationNovember 2, 2006

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Question & Answer Session Questions?

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