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Frozen 403(b) - is there a way to force the sole remaining participan


Guest Nadia

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Here is my question:

I have a situation where a 501©(3) company with a 403(B) plan moved all of its employees to a for-profit entity with a 401(k) plan purusant to a corporate deal. At that time, all but one participant in the 403(B) plan elected to withdraw/rollover their funds so the company now has one person in a frozen 403(B) plan that the company continues administer.

My question is, at this point, is there anything that this company can do to "force" the sole remaining participant out of the plan (without violating any laws) other than to simply attempt to "entice" this person with the new rollover options?

What effect, if any, does the fact that this person is under 59 1/2, and experienced a "severance from service" a few years ago when this restructuring took place but has not otherwise had a "triggering event" at this time, have on the participant's ability to rollover such funds, tax-free, under the new law (to the 401(k) plan, for example)?

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If there is only one participant left in the contract, probably the simplest thing to do would be to transfer the contract into the name of that participant. There would be no impermissible "distribution," because the assets would stay in the contract. However, the employer would have nothing left to administer, because the participant would own the contract.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Thank you for your response. I am wondering what the authority for doing this would be. You see, I am trying to advise a client as to what to do and I need some sort of authority to base this on. Will I find it in the regulations or some case?

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The only thing I can really point you to is Internal Revenue Code section 403(B) itself, which says that the contract is to be owned by the employee.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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  • 3 weeks later...
Guest Beth N

Your thread relates to an issue I've been wrangling with for a long time. I don't do much with 403(B)s, but I have a few clients with 401(a) plans invested entirely in annuity contracts. How do the distribution rules work there? The employer's preference is to limit the number of plan participants and the amount of plan assets (to keep the plan small for purposes of 5500 reporting, possible EPCRS corrections, etc.). But how do we make distributions? Can we "entice" the participant to take a distribution of their annuity contract? If they don't actually draw dollars from the contract it's not taxable, right? Any citations to authority for this assumption? And if it's a distribution, is it reportable on a 1099, or treated as a rollover, or what?

Bottom line is I'm having a very hard time believing this employer has to keep all former employees in the plan forever and ever until all the $ are paid from the annuity contracts, but I can't find the mechanism (and I need authority to support the mechanism!) for paying the amounts out of the plan and into the hands of the participants.

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Guest dynalow

Beth N

As long as the 401a is cashable, the distribution could be rolled to an IRA, it would generate a 1099r with a distribution code indicating the funds were directly rolled to and IRA and there for not taxable.

The employer who contributed to the 401a may have restrictions on cashability such as age and or # of years of service or may not allow cash at all and funds could be be only taken out as a life time annuity. Usaully the only authority to chage the cash rules is the employer itself, not the TPA.

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Guest Beth N

That's true, but my question is what if the former employee wants to hold on to their annuity contract with the annuity provider. Can the contract itself be distributed (that is - not cashed out) without taxation to the employee? Since my original post I've looked at Code section 403(a), and think the answer might lie there. Any other thoughts?

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I think you are correct that section 403(a) would allow such a transfer. Also, this is what the PBGC requires in the case of terminating plans, so it is hard to believe that it would be forbidden in the case of other types of plans.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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