Eaton Peabody

On July 23, 2007, the IRS finalized regulations that relate to Section 403(b) plans. These regulations are the first comprehensive set of regulations issued since 1964 with respect to Section 403(b), and incorporate numerous changes that have been made over the years. The final regulations generally apply for plan years beginning on or after December 31, 2008. Highlights of the regulations are as follows:

- The final regulations implement the requirement contained in the 2004 proposed regulations that a 403(b) program be maintained pursuant to a written defined contribution plan which satisfies Section 403(b) both in form and operation. This requirement means that those employers with unwritten arrangements will now have to ensure that appropriate documentation is in place by December 31, 2008.

- The final regulations implement the provisions of the 2004 proposed regulations that permit three types of non- taxable exchanges or transfers of amounts in 403(b) contracts, i.e., contract exchanges, plan-to-plan transfers, or purchases of permissive service credit.

- The final regulations implement the provision contained in the 2004 proposed regulations that the 403(b) exclusion applies only to the extent that all amounts contributed by the employer for the purchase of an annuity contract for the participant do not exceed the applicable limits under Section 415.

- The final 403(b) regulations provide that a Section 403(b) plan can provide for age 50 catch-up contributions in addition to the special catch-up contributions for certain employees with 15 or more years of service. The final regulations provide that an employee who is eligible for both will first be treated as making the special Section 403(b) catch-up contribution and then as making the age 50 catch-up contribution.

- The final regulations implement the 2004 proposed regulations provisions regarding when distributions can be made from a 403(b) plan as well as rules regarding rollovers.

- The final regulations provide that in order to satisfy the universal availability requirement, all employees of an eligible employer must be permitted to have Section 403(b) elective deferrals contributed on their behalf if any employee may elect to do so. The right to make elective deferrals also includes the right to designate elective deferrals as Roth contributions.

- The final regulations implement the provision in the 2004 proposed regulations that will allow terminating 403(b) plans that meet certain requirements to make a distribution of accumulated benefits in a lump sum with the associated right to roll over eligible rollover distributions to an eligible retirement plan.

- The final regulations retain the basic rules contained in the 2004 proposed regulations regarding controlled groups for tax-exempt entities. The rules do not apply only to Section 403(b) plans but apply on a broader spectrum to determine when tax-exempt entities are treated as a single employer. The basic rule is that common control exists if at least 80 percent of the directors or trustees of one organization are either representatives of or are directly or indirectly controlled by the other organization.

In response to the issuance of the final regulations, the Department of Labor issued a Field Assistance Bulletin on July 24, 2007 to indicate that despite the requirement that all 403(b) contracts must be maintained pursuant to a written plan document under the final regulations, employers may still be able to take advantage of the safe harbor under DOL regulations that exempt certain 403(b) arrangements from Title I of ERISA.

If you have questions, or would like to discuss the effects of the final regulations on your 403(b) arrangements, please contact Christine Burke Worthen, a shareholder and Chair of Eaton Peabody's Tax Practice Group.

This alert is provided as general information, and is not a substitute for legal or other professional advice.

To ensure compliance with requirements imposed by the U.S. Treasury Department and the Internal Revenue Service, we also inform you that any federal tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties that may be imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein.