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"Black-out" periods for 403b transfers?


Guest Hardy Eubanks
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Guest Hardy Eubanks

I have a client that is moving from one vendor to another vendor. This move involves moving from traditional balance forward accounting to a daily val environment. Does Rev. Rul. 90-24 (or some other guidance) allow a "black-out" periond, similar to that for 401k plans? Can account balances be moved to a non-interest bearing account for a short time while the valuation is being completed? Does the answer differ if the account balances are annuities or custodial mutual funds (403b7)? The plan document (this is an ERISA plan) is silent as to this. Any help is appreciated.

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Because this is an ERISA plan, it should be subject to the same fiduciary rules as a 401(k) plan.

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Guest PeterGulia

In addition to fiduciary duties, the plan sponsor may wish to satisfy itself that the amounts will at all times be held under a 403(B)-"qualifying" investment.

Internal Revenue Code 403(B) requires that amounts be held under an annuity contract, life insurance contract, or custodial account that invests only in mutual fund shares. Would the "non-investment" time be more than a few business days? If so, unless the "non-interest-bearing account" is controlled by a 403(B) insurer or 403(B)(7) custodian that has contract duties for the amounts so held, there may be a question concerning whether the amounts are 403(B) amounts.

You make an interesting point that Revenue Ruling 90-24 might suggest that some reasonable processing time is incident to a 403(B) investment transfer, but it's unclear whether that Ruling relates to the situation you describe.

As always, the plan sponsor should get the advice of expert tax counsel.

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It sounds like the plan's prior funding vehicle was not participant-directed. If so, then you're not involved in the sort of involuntary disinvestment and mapping over exercise that occurs when you migrate from one participant-directed vehicle to another, which really hangs the employer out on a fiduciary responsibility limb. I gather that the blackout period you refer describes the delay in the start-up of the participant-directed feature of the new funding vehicle in the first place. If the new vendor is going to establish starting account balances in a cash or cash-equivalent investment option (like a money-market investment fund), then the employer will have some fiduciary liability exposure, i.e. the diversification and prudent expert standards are in play. As a practical matter, the employer could probably show that converting to a participant-directed arrangement satisfies these standards so long as the standstill period is reasonably related to achieving this goal. In my experience, 30-60 days is not unusual and unlikely to give the DOL heartburn, depending upon the complexity of the plan and the number of participants. However, if the market were to take off during this period, the employer's exposure to individual participant fiduciary duty litigation may loom somewhat larger. Rev. Rul 90-24 considers whether a transfer from one 403(B) annuity/custodial account under one contract to another contract maintained by the same employer is a "distribution." The Service concluded that so long as the transferee contract does not relax the distribution restriction applicable under the transferor contract, the transfer is not a "distribution." However, you can't take any comfort from this ruling regarding the fiduciary responsibility issues raised above.

[This message has been edited by PJK (edited 05-12-2000).]

[This message has been edited by PJK (edited 05-12-2000).]

[This message has been edited by PJK (edited 05-12-2000).]

Phil Koehler

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