Termination of 403(b) plan

[Guest Lonnie Tomlin]

My understanding is you cannot terminate a TSA plan. I have attended several conferences where the IRS and DOL have confirmed this. Is anyone aware of a change in this. I have a hospital client who has an insurance company tell them they will take care of it, so the hospital doesn't have to worry about 5500 filings or J&S signatures. The hospital is merging with another hospital which has a cash balance plan and voluntary tsa program. My client maintains an ERISA tsa and wants to terminate it. I told them they can't terminate or merge with either of the plans maintained currently by the hospital being merged into. Please let me know this has changed.

[MWeddell]

The 403(B) Answer Book, Q 8:54, explains that one may terminate the plan eventually but because there are no provisions (in contrast to 401(k) plans) allowing for distribution of 403(B) assets upon plan termination that the terminated plan is still maintained until the last employee turns age 59-1/2 or separates from service. Quite a wait!

In terms of merging it into another 403(B) plan, if it's an ERISA plan where the plan sponsor has fiduciary obligations to make sure the investments are prudent, this has to be allowed. However, if it's a non-ERISA plan where it's essentially just a contract between the employee and the annuity issuer, then the employer doesn't have that right.

[Guest Jeeves]

Is the inability to terminate an ERISA TSA predicated on the prohibition against transferability in 401(g) & 1.401-9(a)(1)?

I would be interested in the citations from the 403(B) Answer Book for the proposition that you can't distribute the assets. Is it based on transferability, non-forfeitability, or just a lack of authorizing language to terminate? Thank you.

[MWeddell]

The 403(B) Answer Book's argument (Q 8:54) seems to be based on lack of statutory language analogous to 401(k)(10)(A) that would authorize 403(B) money to be distributed upon plan termination.

1-800-901-9074 is the publisher's number if you'd like the book. I think it's useful and no, I'm not affiliated with the publisher.

[Guest Robert Collins]

At the ASPA Conference in DC in October, speakers from the IRS & DOL discussed termination of a 403(B) plan. The IRS's point of view is that plan termination is not a reason for distributing 403(B) assets. The DOL's point of view is that "maybe" termination of an ERISA 403(B) plan is possible, but no employer has approached the DOL to ask for an opinion letter on terminating a 403(B) plan subject to ERISA.

[Guest RARogers]

Even though you cannot terminate a TSA in the sense that payments are not made to participants, it may be possible to terminate the employer's sponsorship of the TSA.

Unlike qualified plans a TSA does not require a plan sponsor - an arrangement whereby an employer merely transmits salary reduction amounts to a TSA set up by the individual is not an employer-sponsored plan, but it is still a valid TSA.

Theoretically then the employer who sponsors a TSA could give up the sponsorship, so that it would no longer be an employer-sponsored plan, and therefore no longer an ERISA plan. The result of this from the employer's point of view would be the equivalent of "plan" termination (though not termination of the TSAs).

How would an employer give up sponsorship? I think it could be done simply by formally discontinuing any of its responsibilities towards the plan, and by transferring those responsibilities to the mutual fund custodian or insurance company that holds the TSA contract. Basically, the TSAs would become individual TSAs at that point that would be controlled by the individual and the mutual fund custodian or insurance company.

A similar procedure occurs when a qualified plan is terminated - any amounts that cannot be paid to the individual are used to purchase an insurance contract that provides the same benefits to the individual that would have been provided by the employer-sponsored plan.

There may be some fiduciary issues with this procedure, because if the TSA is an employer sponsored plan the employer may have the responsibility of ensuring that the individual TSAs are appropriate - see the DOL rules on the purchase of the "safest available annuities" (I think that's what it's called).

The distinction between termination of the employer's responsibilities, and termination which includes a payment of benefits, is the basis of this approach. I agree that you can't pay out TSA benefits on account of termination of the employer's sponsorship of the TSA, but I think you could terminate the employer's sponsorship of the TSA (and get the employer out of the TSA business).