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Freezing a 403(b) vs plan termination


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An not-for-profit employer has a Non-ERISA 403(b) and an MP plan for ER contributions. They've decided to go the 401(k) route going forward. It's a church plan, so they can avoid the nondiscrimination rules, etc. Rather than terminating the 403(b) plan, it seems to me that it makes more sense to stop contributing to the 403(b) and let it die a natural death.

Does anyone think that plan termination is the better way to go?

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The new 403b regulations and section 8 of Rev Proc 2007-71 are not clear on when termination occurs if the ER gets no cooperation on payout within a reasonable time from a 403b vendor. However, section 8 does give a continuing 403b plan (doesn't specify that it has to be an unfrozen one) comfort with regards to the noncooperative 403b vendor after the ER makes a reasonable effort to bring the 403b contracts under the newly document 403b plan and operations. Section 8 also gives concrete guidance on what a reasonable effort entails.

This is particularly problematic for an ER that has allowed the EEs to pick whichever vendors they wanted.

So until the IRS might give further guidance, I think it is somewhat preferrable to adopt a plan document to conform with the new regs and freeze than to attempt a termination altogether.

Also, by terminating, you might trigger loans having to be repaid or deemed distributions and you might be subjecting 403b products to CDFC charges for early termination. Some 403b vendors, however, also offer IRAs and are willing to not charge the CDFC charges if the EE simply elects to roll the 403b over into an IRA with the same vendor.

The advantages for terminating are not having to keep the new 403b plan document up. Already, the IRS is preparing a list of required modifications for future updates. If all 403b vendors will cooperate with making timely distributions incident to the termination of the 403b plan, then a 12 month clock will start ticking once the last such distribution is made. When that 12 months ends, the ER would have the option of beginning a new 403b plan if it so desired.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest Sieve

Does that mean, John (or anyone), that an employer in this instance--who is moving to a 401(k) as of 1/1/2009--must adopt a 403(b) plan document (assume they don't already have one) even though they intend no longer to permit employees to contribute to the 403(b) after instituting the 401(k)?

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If no new contributions were made after 2004, the 403b contracts are sort of 'free radicals' and the ER does not need a document under the new regs.

If any contributions were remitted from the ER (due to elective deferrals or otherwise) after 2004, then the ER will need a 403b plan document by 1/1/2009.

Prior to the new regs, there was no procedure or authority for an employer terminating. Now there is. The new regs do not, however, specify a plan terminating before 1/1/2009 not needing a plan document.

You might find that a freeze is easier to deal with than a termination of the 403b, particularly if there are multiple vendors and one or more will not cooperate in distributing the 403b products within a reasonable time of the termination. Freeze too requires a 403b plan document before 1/1/2009.

You ought to look at section 8 of Rev Proc 2007-71, as well as Treas Reg sec 1.401(b)-10(a).

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest Sieve

If you freeze the TSA, how do current employees get their $$ rolled into the new 401(k)? Although Treas. Reg. Section 1.403(b)-10(a) is entitled "Plan terminations and frozen plans", and it authorizes the elimination of future contributions for current employees, it does not specifically speak in terms of permitting distributions from a frozen plan, only a terminated plan. Also, Reg. Section 1.403(b)-6(d) refers only to a terminated plan and not to a frozen plan.

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Hi, Larry,

I didn't understand from your first post that they wanted to do rollovers into the 401k. That would require a distribution triggering event. For those yet employed, under age 59 1/2 years and not disabled, that would require a termination of the 403b plan.

Termination, per the regs, requires complete payout from the 403b products within a reasonable time. If all the vendors of 403b products to which the ER has remitted $ since 1/1/2005 will cooperate, that's not problematic to accomplish. Each EE would be given a 402f notice and option to roll to the 401k plan.

If any such 403b vendor is uncooperative, you cannot effect termination. Thus, termination would not be effective as to any EEs as a distribution trigger.

Bob Architect has, to date, not provided any answer or resolution to this dilemma.

One work-around I am contemplating is to document two 403b plans by 12/31/2008. They will have identical terms and conditions, but separate three-digit numbers and plan names. One will be for the 403b vendors that are cooperative and one for those that are not. Then terminate the cooperate-vendors plan so that termination of the plan can be a distribution trigger. The plan for the non-cooperative vendors would simply be frozen (no new $) but the plan docs kept up. A copy of that plan's docs would be sent to each uncooperative vendor.

The problem with simply ignoring the uncooperative vendors altogether and just doing the 403b plan document for the cooperating vendors (and then terminating it) is that section 8 of Rev Proc 2007-71 explains that a good-faith, reasonable effort that fails with relation to an uncooperative vendor can be ignored by the ER with regards to its 403b plan. But it does not say that's enough in the termination context. One interpretation would be that you are first documenting the plan (and can ignore the uncooperative vendors after making a reasonable, good-faith effort) and then terminating the plan that by then only applies to the cooperative vendors--who cooperate with the distributions-within-a-reasonable-time requirement for terminations.

However, it is unclear with the uncooperatives are "part of" your plan are not even after your good-faith, reasonable effort is made.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Guest Sieve

I'm not a 403(b) maven, by any stretch of the imagination, but would terminating a 403(b) require terminated e'ees either to take distributions or rollover into another plan or IRA? I.e., if a long-terminated employee did not take a distribution, could they be forced out, as in a qualified plan, without consent? And, wouldn't terminating a 403(b) force those in annuity contracts to suffer a potential forfeiture/penalty for leaving the provider early (unless the provider allowed full rollover into an IRA without penalty)?

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Hey, Larry,

Yes, terminating the 403b plan would require distributions, with the employees having the possibility of rolling over to IRAs, QRPs, etc. This would apply to even long-participating employees. This is a consequence of the new regs requiring the ER to have an overarching 403b plan, similar as to what is required of 401k plans.

Some 403b vendors view the contract as just between them and the employee. They refuse to cooperate with an ER's efforts to bring those 403b products 'under the tent' of the ER's new 403b plan document. In such situations, the ER cannot force the payout on termination of that 403b plan. Ergo, how can there be a 403b plan termination at all if you have uncooperative 403b vendors, despite the new regs specifying that the 403b plan can be terminated by the ER?

Termination and forced payout could in essence force surrender, transfer, exchange, or CDSC charges against the 403b product. However, most 403b vendors also offer IRAs, and in my experience this year, most are willing to reform the product from a 403b one into an IRA with that same vendor without any such charges, presuming the EE chooses to 'rollover' into an IRA with that same vendor his 403b product is now with. Most would impose the charge if the 403b product changes investment types. For example, if it is a 403b annuity and the EE chooses a rollover to an IRA with the same vendor, but to be an investment account, the annuity surrender charges (if any) would apply. But if the rollover was to be an individual retirement annuity with the same vendor, no charge.

Also, if there are outstanding loans against the existing 403b products, such cannot be rolled into IRAs. Thus, termination and required distribution would (as to cooperating vendors) require immediate payoff of the loan balance before the rollover to the IRA or will be a deemed distribution at that time.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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Larry,

One more idea if you are winding down an existing 403b program--or documenting a continuing 403b program.

Treas Reg 1.403(b)-11(e)(1) provides pre-2009 issued 403b contracts are excepted from the Treas Reg 1.403(b)-6(b) prohibition against in-service distributions.

The new plan document could permit in-service distributions for 403b contracts issued before 2009. That could be added to a frozen plan to accelerate the natural runout of contracts. It could be added to a terminating plan as a fail-safe distribution trigger in case the IRS were later to take a stance that uncooperative vendors defeat the reasonable payout requirement for termination and thus termination was not a proper trigger and thus there were premature payouts. Adding in-service as permissible to the pre-2009 as a trigger would make such an IRS stance a useless enforcement tool for claiming premature distributions are made.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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  • 2 weeks later...
Guest Penelope
Larry,

One more idea if you are winding down an existing 403b program--or documenting a continuing 403b program.

Treas Reg 1.403(b)-11(e)(1) provides pre-2009 issued 403b contracts are excepted from the Treas Reg 1.403(b)-6(b) prohibition against in-service distributions.

The new plan document could permit in-service distributions for 403b contracts issued before 2009. That could be added to a frozen plan to accelerate the natural runout of contracts. It could be added to a terminating plan as a fail-safe distribution trigger in case the IRS were later to take a stance that uncooperative vendors defeat the reasonable payout requirement for termination and thus termination was not a proper trigger and thus there were premature payouts. Adding in-service as permissible to the pre-2009 as a trigger would make such an IRS stance a useless enforcement tool for claiming premature distributions are made.

Would this work for custodial accounts? It looks like the exception applies only to insurance contracts issued before 1/1/2009.

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Only annuity contracts, but it is in my experience this year usually the annuity contract vendors that are the least cooperative. Usually the mutual fund-only account vendors are cooperative.

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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