Guest Article

TSA Access Restrictions as a Bar to Rollovers

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by Joel L. Frank

Under the Internal Revenue Code prior to the Unemployment Compensation Amendments of 1992 ("UCA '92"), a distribution could be rolled over from one 403(b) tax-sheltered annuity ("TSA") to another TSA or to an individual retirement account ("IRA") only if three conditions were met: it was a total distribution or a partial distribution equal to at least 50% of the balance to the credit of the employee, the distribution occurred because of specified triggering events (death, disability, separation from service or attainment of age 59-1/2), and the distribution was rolled over in 60 days.

(IRC sections 403(b)(8)(A) through (D), as in effect prior to UCA '92.)

UCA '92 simplified the rollover rules for TSAs by eliminating the distinctions between total and partial distributions, eliminating the triggering events upon which a rollover was conditioned, and eliminating the requirement that distributions be made during a single taxable year of the employee. (See IRC sections 403(b)(8)(C) and 402(a)(5)(C), prior to UCA '92.)

It is true that UCA '92 did not eliminate certain triggering conditions found in the Code that by their terms specifically apply to distributions from a section 403(b) custodial account or annuity contract. (IRC sections 403(b)(7)(A)(ii) and 403(b)(11).) But TSA providers continue to improperly apply those 403(b) distribution triggering conditions to the 403(b) owner's eligibility to make a rollover to another TSA. This was clearly not the intent of UCA '92!

IRC section 403(b)(7)(A)(ii), applicable to 403(b) custodial accounts, provides, in pertinent part:

(7) Custodial accounts for regulated investment company stock. (A)Amounts paid treated as contributions. For purposes of this title, amounts paid by an employer ... to a custodial account ...shall be treated as amounts contributed by him for an annuity contract for his employee if -- ... (ii) under the custodial account no such amounts may be paid or made available to any distributee before the employee dies, attains age 59-1/2, separates from service, becomes disabled ... or ... encounters financial hardship.

IRC section 403(b)(11) imposes similar conditions on distributions from 403(b) annuity contracts.

Is it not ludicrous to require a 403(b) owner to show that he or she has met one of these "paid or made available" events (death, disability, separation from service, attainment of age 59-1/2 or hardship [footnote] when all the participant wishes to do is rollover the funds to another TSA that, by law, will be subject to those same "paid or made available" conditions? Is this not the very reason UCA '92 eliminated the specified triggering events of death, disability, separation from service or attainment of age 59-1/2, which previously were required for the making of a valid rollover?

This construction of the Code by TSA providers unjustly denies rollover rights. The Senate soon will take up the Retirement Security and Savings Act of 2000. This would be an ideal place to enact a clarification that the early distribution triggering conditions of Code sections 403(b)(7)(A)(ii) and 403(b)(11) do not apply to rollover distributions.

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Footnote: Hardship distributions are no longer eligible for rollover treatment. See Code sections 402(c)(4) and 403(b)(8)(B), as amended by the Internal Revenue Service Restructuring and Reform Act of 1998.

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Joel L. Frank
PO Box 148
Marlboro, New Jersey 07746-0148
(732) 536-9472
rollovertsa@dellnet.com

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