TO: Local Presidents

FROM: Mitchell Roth, General Counsel, Illinois Education Association

SUBJECT: Changes to 403(b) Transfers

DATE: Sept. 13, 2007

As you may be aware, the IRS has been working on new regulations that affect 403(b) accounts. The final IRS regulations were published on July 26, 2007. They will have a direct impact on IEA members and locals. This memo will briefly explain the new regulations and inform you of one critical change that will IMMEDIATELY affect members of IEA. We are asking that you IMMEDIATELY share this information with members, as they must make time-sensitive decisions in light of this one change as explained below.

The new law eliminates some of the independence enjoyed by employees under 403(b) plans and places compliance and oversight responsibilities for plans on employers. Employers will now be required to maintain written plan documents governing how such plans are structured and what options are available to participating employees.

Generally, some key developments in the new regulations are:

* The written plan document will include the list of 403(b) products available to employees.

* The written plan documents will address the availability of hardship withdrawals and loans, and other terms.

* Exchanges (changing from one 403(b) investment contract to another) will be restricted.

* Transfers (moving a 403(b) account from one employer’s plan to another due to a job change) may be restricted.

* Employers will have increased responsibilities and liabilities in supporting 403(b) plans.

The effective date of the regulations depends on whether the 403(b) plan is offered pursuant to your collective bargaining agreement (“CBA”). For all plans that are part of a CBA that was in effect when the regulations were published on July 26, 2007, the effective date will be either your CBA expiration date or July 26, 2010, whichever is earlier. If the 403(b) plan is not maintained as part of your CBA, employers must comply as of January 1, 2009.

In order to comply, employers will begin to develop their written plan documents. The IRS indicated that it will provide model language for employers to use. The provisions of the plan will likely address matters that are mandatory subjects of bargaining under the Illinois Educational Labor Relations Act.

In the meantime, there is one critical change that demands your immediate attention. Under Internal Revenue Service Revenue Ruling 90-24, employees could make 403(b) contract exchanges between companies at their discretion (without employer approval), provided their 403(b) plan document (if one existed) did not prevent the exchange. This rule will now expire on September 24, 2007. Therefore, IEA is advising that any member who desires to exchange an investment contract should do so by that date. The required paperwork must be completed and accepted by the receiving vendor by September 24, although the check can be sent after that date. Employees who make any changes after September 24 should understand that there is a risk to doing so, as they can only use vendors that are approved by the employer and then appear in its written plan document, which will not be developed until a later point in time. If an employee moves money from an existing contract to one that is not issued by a vendor that is later approved by the employer, the entire amount of money may become immediately taxable and penalties may be assessed for early withdrawal.

Numerous industry representatives, employer groups and employee organizations have asked the IRS to delay the expiration of Revenue Ruling 90-24 and extend the time period for unrestricted exchanges. If the deadline is not delayed, IEA advises that the safest course of action is as follows: After September 24, members should avoid moving money from one company to another until such time as the employer’s written plan is developed and approved vendors are identified.

If your tax-sheltered annuity account is UNDER ONE CONTRACT with a mutual fund company, such as Vanguard, you can still reallocate or shift your money among mutual funds within that same contract. But if your change in investment vehicle results in a new contract with that provider, you will run the risk described above. For example, if you have an account at Vanguard with a variety of mutual funds, you will still be able after September 24 to move money among those funds. But if you remove the money from the mutual funds and buy a Vanguard tax-deferred annuity, Vanguard will treat that as a new contract.

If you plan on making exchanges after September 24, you should contact your employer to see which vendors it has approved (vendors with whom the employer has "information-sharing agreements" (ISA)). If you make a transfer to a vendor that is not approved, you run the risk of the transfer being taxed, unless the employer enters into an ISA with that vendor by the effective date of the rules.

You should contact your investment provider or company and your own personal tax advisor if you wish to make any changes within the investment vehicles offered by that company to ensure that your investments will remain under one contract.

As plans are developed, locals should seek advice from their UniServ Directors, and work with the districts to ensure that the Association-endorsed 403(b) products, along with any other products that members currently contribute to, are included in their district’s written plan document.