ARLINGTON, Va. - NAFCU has thrown its support behind an IRS proposal that would provide updated guidance on section 403(b) contracts of public schools and organizations exempt from tax under 501(c)(3). As it stands, federal credit unions cannot offer these plans to their employees, but many do provide 403(b) plan investment or administrative services for eligible members through a credit union service organization, said Fred Becker, NAFCU president/CEO in a Feb. 14 letter to the IRS. Overall, NAFCU supports the IRS update of the proposed rules, which reflects changes in the law that have taken place since the regulations were last substantively amended and eliminates outdated provisions, Becker assured. NAFCU notes that the regulations as drafted do provide more uniformity in the tax treatment of different types of plans and annuities. In particular, NAFCU supports the rules regarding elective deferrals and distributions that are similar to 401(k) plan rules. NAFCU also supports the new written plan requirement. As with a qualified plan, the regulations require a 403(b) plan comply with the requirements in form and operation. The regulations specify that a plan should include all material provisions, including eligibility, benefits, limitations, contracts available under the plan and distributions. Previously, a 403(b) plan needed to be in writing only if it was subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA), and then it was not clear what language the document needed to contain, Becker wrote, adding having a written plan requirement "will relieve this (uncertainty)." Still, NAFCU is concerned that the written plan requirement may subject "deferral only" 403(b) plans to Title I of ERISA and is urging the IRS to issue further guidance on this matter. Meanwhile, on another related proposal, NAFCU has also urged the IRS to consider more flexibility with its phased retirement plan proposal, which would allow a pro rata share of an employee's accrued benefit to be paid under the program. The pro rata share would be based on the amount of work hours reduced. In a Feb. 8 comment letter, NAFCU expressed approval overall for the proposal but suggested a different way to calculate benefits. "A `counting hours' method would be administratively burdensome and reduce flexibility," NAFCU wrote. As an alternative, the association has suggested a "safe harbor" method that allows the worker and employer to mutually agree on a material reduction in work schedule and responsibilities, with hours to be figured if more than a 20% benefit is sought. Other options are basing the retirement benefit on the reduction in the employee's base pay; or using methods applied to salaried or executive workers for whom hours are not counted, comparing the number of hours in the employee's reduced work schedule with his or her full-time schedule, NAFCU recommended. All amounts paid from the benefit plan, including phased benefits, should be deducted for actuarial purposes from the value at full retirement and the IRS should adopt special rules regarding the impact on phased retirement plans of late retirement increases and suspension rules, NAFCU wrote. [email protected]