403(b) & ERISA 414(l)

[Guest Astro]

The final 403(b) regs require the accumulated benefit in a new contract immediately after an exchange to be at least equal to the accumulated benefit in the old contract immediately before the exchange. The IRS/Treasury have indicated that this rule has been in existence under ERISA sec. 414(l) and that they won't answer any questions because this is an ERISA issue.

Obviously, a surrender charge upon exchange of the old contract would not comply.

* But, what if the new contract has a CDSC; would that comply?

* What if the cash value and cash surrender value in both the old contract and the new contract are the same, but the new contract has higher purchase rates due to increased longevity; is that a violation?

* Contracts don't usually match up feature for feature - how precise is the valuation requirement when comparing the accumulated benefits under the contracts? What considerations go into the determination of the amount of the accumulated benefit?

[jpod]

Is it "obvious" that a surrender charge on the outgoing contract violates the regs? I was just thinking about that the other day in reviewing the regs. I don't see anything in the regs. or the preamble that addresses the issue. Same issue for a sales load on the new contract.

[Guest Astro]

You raise a good point. I may have jumped to the conclusion that a CDSC can't be assessed too quickly. The regs under Section 414(l) require that each participant receive benefits on a termination basis (as defined in (b)5) from the plan immediately after the merger, consolidation or transfer which are equal to or greater than the benefits the participant would receive on a termination basis immediately before the merger, consolidation, or transfer. If the industry practice is to charge a CDSC at termination of a plan and that has met the requirements of 414(l), this should meet the requirements under the final 403(b) regs. Hopefully, there will be more discussion on this issue before 9/25/07.

[jpod]

Astro: Don't get me wrong; I don't know the answer to the Q. I just think it's still an open Q.

[Guest mjb]

IRC 414l applies only to qualified plans not to 403(b) plans. There is no ERISA 414l.

[jpod]

mjb: Unfortunately, or fortunately, I can't decide, the 403b regs. reference 414(l) as the analogous source for resolving the Q raised in this thread. By the way, the rules of 414(l) do apply to ERISA-governed 403(b)plans, to the extent you have a transaction that is described in 414(l), which I admit is a questionable proposition. See ERISA Section 208.

[Guest mjb]

I dont know how a reg can be applied by analogy instead of by explicit reference in the statute. 414l states that it only applies to plans subject to 401(a) and 403(a). 403(b) plans are still not qualified plans and 414l has no application to them. If the Mirror image rule under 208 of ERISA applies it can only be enforced by the DOL.

Also what good will it do to apply 414l to a 403b transfer other than to prevent a participant from getting out of a bad investment as long as a charge on account of the transfer will reduce the account.

[Guest Astro]

Check out the new 403(b) regs. There are 4 references to IRC section 414(l) and the regs under it. I made a typo on my first entry since I'm used to quoting ERISA.

[Guest mjb]

Since you brought the issue to the forum what do the regs say and how can a statutory provision that is explicitly limited to a qualified annuity under 403(a) be extended to 403(b) plans. Inquiring minds want to know.

[Guest Astro]

Alright. If you haven't read the regs yet: One of the requirements under the new regulations is that a section 403(b) contract of a participant or beneficiary may be exchanged for another section 403(b) contract of that participant or beneficiary under the same section 403(b) plan if after the exchange the participant or beneficiary has an accumulated benefit immediately after the exchange that is at least equal to the accumulated benefit of that participant or beneficiary immediately before the exchange (taking into account the accumulated benefit of that participant or beneficiary under both section 403(b) contracts immediately before the exchange). This condition is satisfied if the exchange would satisfy section 414(l)(1) if the exchange were a transfer of assets.

The question I posed was whether a CDSC or MVA upon exchange of the contract would meet this requirement. I am the inquiring mind who wants to know.

[Guest mjb]

under 414l what is the participant's benefit in a DC plan ?

[Guest Astro]

under 414l what is the participant's benefit in a DC plan ?

If exchanges have been allowed in the past where either/both CDSC or MVA were taken and those exchanges met the requirements of IRC sec. 414(l), I don't see why we couldn't still operate this way and meet the requirements of the new 403(b) regulations.

Here are the new regs:

Final_403_b__Regs.pdf

[Guest mjb]

The definition of an defined contribution plan under IRC 414(i) provides that the participants' benefits are based solely upon amounts contributed to the participants accounts and any income, expenses, gains and losses as well as forfeitures from other participants' accounts which may be allocated to a participant's account. Why isnt a CDSC an expense allocated to a participant's account?

[joel]

The definition of an defined contribution plan under IRC 414(i) provides that the participants' benefits are based solely upon amounts contributed to the participants accounts and any income, expenses, gains and losses as well as forfeitures from other participants' accounts which may be allocated to a participant's account. Why isnt a CDSC an expense allocated to a participant's account?

Of course it is!

[Guest RD73]

The definition of an defined contribution plan under IRC 414(i) provides that the participants' benefits are based solely upon amounts contributed to the participants accounts and any income, expenses, gains and losses as well as forfeitures from other participants' accounts which may be allocated to a participant's account. Why isnt a CDSC an expense allocated to a participant's account?

Of course it is!

I do not see the certainty in the above answer. The 403(b) Regs., in 1.403(b)-10,require the "Accumulated benefit" to be after the transfer at least equal to the benefit before the transfer. Additionally, the Regs provide that the rule is satisfied if the exchange would meet 414(l) if the exchange were a transfer of assets.

IRC 414(l) does not incude the defined term "defined contribution plan." So, I do not follow how the above definition, which obviously includes expenses, applies to the the quesiton raised in this post.

I think the correct conclusion is reached, but do not think the Code and Regs are clear on this point.

[joel]

A CDSC is a normal fee under the annuity contract or custodial account and has nothing to do with the new transfer/exchange rules. A transfering issuer may not charge a specific fee in order to effectuate the transfer; this is not allowed by the new regs or the old regs for that matter.

Joel

[Guest mjb]

Reg 1.403(b)-2(b)(1) defines the accumulated benefit to be the total benefit to which a participant is entitled under the contract including all contributions and earnings and is consistent with the defintion of a 403b annuity in IRC 415(k) (1) as a defined contribution plan under 414(i) in which the benefits are based solely on amounts contributed to a participant's account and any income, expenses, gains and losses. If the funds are transferred the benefit under the contract will be reduced by any expenses which can be charged under the contract. Are you claiming that the benefits in a 403b contract cannot be reduced for expenses and fees permitted under the contract?

The 414(l) regs only apply to 403b plans subject to ERISA.