403b transfer to 401k

[Guest billy bong]

1. given the recent pension reform, must the 403b plan first be terminated prior to transferring (actually a rollover, yes?) the $ to a 401k?

2. since a plan term is not a distributable event, how exactly can 403b money be transferred out to a 401k?

3. if the 403b is terminated, and since a plan term is not a distributable event, assets are frozen? so the participants just watch their $ and hope it grows over time? until they terminate employment from that organization, then rollover to an IRA... or another 403b or 401k...?

thanks for any assistance provided.

[Carol V. Calhoun]

You're right, a transfer from a 403(B) to a 401(k) can take place only if it is in the form of a rollover, which means that there must be some distributable event first.

However, a 403(B) contract is typically owned by the employee. So unless the plan provides otherwise, an employee could elect to have money directly transferred from the existing 403(B) to another 403(B), without a distribution, even before termination of employment or other distributable event.

Also, money in a 403(B) plan can be directly transferred, even during employment, to a defined benefit plan for the purchase of service credit, assuming that both the 403(B) plan and the defined benefit plan permit such transfers.

[Guest Noidy]

Are you saying that if there is an employer that now has a 401(k) for ongoing contributions AND an ERISA 403(B) that still has money in it but does not take new contributions, the employer cannot combine both plans together into just one 401(k) in Jan 2002? They would need to continue to run both plans side-by-side?

Only employees who leave and rollout can then roll back to a 401(k) with a new employer?

[Guest smueller]

Note that even having asked a large mutual fund company that markets individual and employer 403b plans, there seems to be no difinitive answer post -Egtraa on whether an employe, or individual if the 403b contract is an individual arrangement can l. terminate the contract; and 2. rollover to the same tax-exempt employers 40lk plan...since they don't want to have 2 plans anymore and 403b has been frozen ever since the 40lk was established....interestingly, in this particular 403b plan agreement, it says the employer can terminate the plan at anytime and if the assets arently transferred directly to another 403b plan, then the assets are to be distributed to the participants in accordance with Article X...which throws you back into a loop,,,cause its the provision requiring a "distributable event"..and PLAN TERMINATION IS NOT ONE OF THEM...

So now where does that leave us?..anyone see a PLR addressing this issue?...thanks for listening

[Carol V. Calhoun]

Noidy, that is what I'm saying. I'm not saying it makes sense, just that this appears to be the state of the law.

[Guest smueller]

Thanks Carol..by the way I do spell better than my prevous email, must be computer snakes.....I now think having spent too much time looking at the 403(B)...40l(k) scenario being dicussed, that you are trapped in the 403(B) absent a distributable event occurring....will try looking at PLRs but so far its been to no avail

[jane123]

Also, money in a 403(B) plan can be directly transferred, even during employment, to a defined benefit plan for the purchase of service credit, assuming that both the 403(B) plan and the defined benefit plan permit such transfers.

Carol ( I welcome responses from others too),

I just want to be clear on this matter.

By “transfer” do you mean a non-reportable transaction?

I think it would be a direct rollover ( reportable but not taxable transaction).

Also, are you saying that the 403(b) participant can move the money to the defined benefit plan without experiencing a triggering event? If so, how is this affected by the 403(b) document it is does not provide for such a transaction?

[joel]

Revenue Ruling 90-24 permits in-service, regardless of age capital transfers from one 403b to another 403b. No triggering event is required. THIS IS A TRANSFER NOT A ROLLOVER.

In order to effectuate a rollover from a 403(b) to another eligible plan a triggering event must be present: See 403(b)11 and 403(b) 7 (A)ii for these events.

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I am under the impression that the final 403(b) regs will be issued soon. Hopefully they will include the right, under Revenue Ruling 90-24, for a 403(b) participant to directly transfer (not rollover) his account to a 457(b)/401(k) plan maintained by the same government employer. Also look for the steps to follow in order to terminate a 403(b) Plan. We have been waiting since 1959 for these required steps.

[joel]

JOEL L. FRANK

PO Box 148

Marlboro, NJ 07746-0148

(732) 536-9472

Fax: (732) 536-7373

Email: rollover@optonline.net

July 18, 2003

Re: Final section 403(b) Rules and Regulations

William Bortz

Associate Benefits Tax Counsel

Office of Benefits Tax Counsel

US Treasury Department

1500 Pennsylvania Avenue

Washington, DC 20220

Dear Mr. Bortz:

Revenue Rulings 67-361 and 67-387 (authority granted to PERS to operated a 403(b) plan) were issued at a time when section 403(b) permitted only one investment vehicle, the commercial annuity under section 403(b) 1. Under section 401(a) public employee retirement systems had been in the annuity business (fixed or variable) for many decades so the Service felt that these entities could well serve their participants in the 403(b) 1 annuity area. This was the rationale for the 1967 Rulings. The rationale ceased to exist when, as part of ERISA in 1974, the Congress added section 403(b) 7 to the Code authorizing mutual funds as an alternate funding medium making clear the Congressional intent for just two funding vehicles for 403(b) arrangements: a commercial annuity contract under section 403(b) 1 and a custodial account for investment in mutual funds under 403(b) 7.

Revenue Ruling 82-102 has one fundamental flaw that the final rules should address. It does not require, that in order for a public employer to continue to offer a PERS 403(b) plan it must also offer commercial annuities and mutual funds …the two statutory 403(b) funding vehicles. This is a reasonable requirement in light of the fact that the Rulings no longer permit a PERS to first start a 403(b) plan.

A case study is the Department of Education (DoE) of the City of New York. Even though the commercial annuity under 403(b) 1 was first made available to public school personnel in 1961 the DoE did not sponsor a 403(b) 1 annuity plan until 1970 when it designated its Teachers’ Retirement System of the City of New York as its sole 403(b) 1 annuity vendor. The DoE as employer, has never allowed the two statutory funding mediums: the commercial annuity and mutual funds to compete with the TRS 403(b) Plan. The TRS 403(b) Plan started in 1970 with two investment options: a fixed interest account and a variable annuity for investment in common stock. This common stock fund is now referred to as Variable A because in 1983 the legislature authorized a second variable annuity fund called Variable B. Variable B was to operate as a balanced fund. Rather than following its legislative directive and invest in “fixed income and equities securities” the Trustees for the past 20 years have managed the Variable B fund as a stable value fund. This investment policy decision has resulted in the Trustees being defendants in a multi-billion dollar class action lawsuit alleging (among other things) gross mismanagement of the assets of the Variable B fund.

Investment changes for future contributions may be made on a quarterly basis. The request has to be made at least 60 days in advance. Account balances may be transferred among the three investment funds no more rapidly than in monthly installments over a year. This request also must be made at least 60 days in advance. A request for a Revenue Ruling 90-24 transfer must also be made at least 60 days in advance. Unit values are calculated monthly. One would be hard pressed to find a more abusive 403(b) plan. The plan would be in clear violation of ERISA section 404© if not for the fact that PERS are exempt from the ERISA. These plan abuses never would have evolved if Revenue Ruling 82-102 required the inclusion of commercial annuities and mutual funds in the vendor list for 403(b) investing. This is what happens when there is no competition. If not for this abusive monopoly the TRS 403(b) Plan would have far less assets under management.

In my view the teachers and other public school personnel of the City of New York would be much better off if the TRS 403(b) plan was dissolved. Many have stopped contributing and have, thanks to Mayor Mike Bloomberg’s invitation, begun contributing to the Citywide Deferred Compensation Plans under sections 457(b) and 401(k). Rather than being forced to transfer their TRS 403(b) balances to a commercial annuity or mutual fund under Revenue Ruling 90-24 these teachers would much rather have the City of New York manage their retirement savings by transferring their balances to the 457(b)/401(k) plan that they currently contribute to. These transfers, however, are not allowed because Revenue Ruling 90-24 requires that a 403(b) arrangement may only be transferred to another 403(b) arrangement. It is imperative that the Final Regulations allow not only for the formal dissolution of a 403(b) plan but also to allow for transfers to 457(b)/401(k) plans under Revenue Ruling 90-24.

Should you have any questions or require clarification of these issues please do not hesitate to contact me.

Peace and Hope,

Joel L. Frank

[joel]

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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)© and 402(a)(5)©, 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©(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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