Tax-exempt employers have offered tax sheltered annuities to employees for years. Traditionally, the employers would often assume only a nominal role. No formal plan document would be drawn, and the only written instruments would be one or more annuity contracts (or custodial accounts) entered into directly by the employee with an insurance company or bank custodian. The employer would then withhold money from the employee's paycheck and deposit it with the insurance company or custodian for the employee's account. Until paid out, the money deposited is income tax free and accrues interest tax free.

Effective January 1, 2009, this is all changing, because a new IRS regulation for tax sheltered annuities, also known as §403(b) plans, requires that these plans have a formal written plan document, which, among other things, must identify all of the insurance contracts (or custodial accounts) used by employees under the plan. Because employers may not even be aware of all the contracts (and custodial accounts) entered into by their employees over the years, even if employers adopt formal plan documents, they will not be able to satisfy the contract-listing requirement. Yet failure to comply fully with this requirement by January 1, 2009 will cause the contracts (and custodial accounts) to cease to qualify for special tax treatment.

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