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403(b) distributions


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Plan sponsor is trying to terminate a 403(b) plan. Plan sponsor is having difficulty getting forms back from a few participants. Under the regs. It is my understanding that the regs provide that the employer can notify the participant that the plan is terminating & that as of a specified date the contract will be treated as distributed. Two questions:

1. Is that a correct understanding of the regs?

2. If I am reading the regs correctly, but the vendor won't do it, is the plan sponsor SOL or are there other options? They want to get this done before year end to avoid the plan document.

Thanks in advance for any guidance.

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Take a look at this thread, 403b Document what you are asking is discussed there, as well as whether a plan document may be avoided all together.

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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To answer your first question, Effective January 1, 2009 all 403(b) plans (i.e., active or frozen status) must be maintained pursuant to a written plan document.

Below are some points of interest:

Should a 403(b) plan sponsor terminate its plan? If so, how is it done?

In order to help a 403(b) sponsor determine whether it is in their best interest to terminate their 403(b) plan it is necessary to understand what the sponsor is attempting to achieve as a result of the plan termination.

1) If the sponsor is attempting to gain administrative efficiencies (or reduce administrative burdens) and consolidate retirement plans, the following are some items for consideration:

• A 403(b) plan cannot be merged with a 401(a) or 457 plan. This includes profit sharing, 401(k), and money purchase pension plans.

• A 403(b) plan can be merged with another 403(b) plan of the same employer. Plan merger is not a distributable event for participants thereby avoiding any potential leakage of a participant’s retirement assets to be used for non-retirement purposes.

• Transition coverage and provision of benefits to an employer’s existing qualified plan (if available) and terminate the 403(b) plan.

 Terminating the 403(b) plan is a distributable event for participants and introduces leakage risk. To minimize risk, sponsors can encourage participant rollovers (sponsor cannot force rollovers) to the plan under which participants are covered.

2) If the sponsor is attempting to simplify their retirement benefit program by reducing the number of plans to which participants can contribute or receive contributions, the following are some items for consideration:

• Transition coverage and provision of benefits to an existing qualified plan (if available) and freeze or terminate the 403(b) plan.

 Freezing the 403(b) plan is not a distributable event for participants so there is no leakage risk.

 Terminating the 403(b) plan is a distributable event for participants and introduces leakage risk. To minimize risk sponsors can strongly encourage rollovers (sponsor cannot force rollovers) to the plan under which participants are covered.

3) If the sponsor is attempting to rid themselves of 403(b) administration and compliance

• The plan sponsor must amend the plan to eliminate future contributions for existing participants, and allowing plan provisions that permit plan termination.

• The plan sponsor must satisfy all requirements of the final 403(b) regulations.

• Notice is given to all interested parties in the plan, informing them of the plan termination (i.e., date of termination, time and form of distribution payments).

• All affected participants must become fully vested in their account balance upon plan termination.

• Reasonable steps must be taken to locate any missing participants or beneficiaries with account balances.

• Unallocated assets remaining in the forfeiture account must be allocated to all remaining participants and must not result in prohibited discrimination.

o If the plan provides that forfeitures will be used to reduce future employer contributions, it first must be amended to provide for reallocation of forfeitures.

• Upon plan termination, the mode of distribution must be by lump sum, rollover to an eligible retirement plan, IRA, or an annuity purchase option.

o Note that the terminating 403(b) plan is permitted to distribute accumulated benefits to plan participants as long as the employer (including any entities in the employer’s controlled group) does not make contributions to another 403(b) contract during the 12 months before or after the termination.

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  • 4 years later...
Guest TPSSalesgirl

What if there are outstanding participant loans? So if a 403(b) Plan termination is a distributable event and this same Employer wants to start a 401(k) Plan, after notice of Plan termination, any outstanding loans will be offset and 1099d. Correct? They cannot roll the loan itself to a 401(k). The participants either have until some date prior tio the actual distirburtion date to pay off the loan in full, or have it offset and pay taxes on the remaining balance. THen any remaining funds can be rolled over th the 401(k). All correct? Any other issues I am missing here?

Thanks guys. :D

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