403(b) Rollovers

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ACCESS RESTRICTIONS AS A BAR TO ROLLOVERS?

By: Joel L. Frank

Under the Code prior to UCA '92, a distribution could be rolled over from a TSA to another TSA or IRA only if (1) is was a total distribution or a partial distribution equal to at least 50% of the balance to the credit of the employee, (2) the distribution occurred because of specified triggering events (death, disability, separation from service or attainment of age 59.5) and (3) the distribution was rolled over in 60 days. Code Section 403(B)(8)(A)-(D), prior to UCA '92.

In general, UCA '92 simplified the rollover rules for TSAs by eliminating (1) the distinctions between total and partial distributions, (2) the mandatory triggering events upon which a rollover could be made, and (3) the requirement that distributions must be made within one taxable year of the employee. Code Sections 403(B)(8)© and 402(a)(5)©, prior to UCA '92.

CONFUSION:

In its Information Letter of May 19, 1995 the IRS laid out its position that the access restrictions found in Code Section 403(B) 11 are a condition precedent to a distribution ---and therefore a rollover---of salary reduction amounts.

On May 21, 1999, however, in its IRM Handbook 7.7.1, Chapter 13, 403(B) Plans, the IRS says at 13.9.2 (1) c.

“Unlike transfers, there must be a distribution event under

the plan or contract to have an eligible rollover distribution”

The various 403(B) issuers have been using the Information Letter and not the Handbook guideline. The early distribution events as enumerated in the Information Letter are quite specific because section 403(B) 11 is quite specific. This contrasts sharply with the Handbook where it says “there must be a distribution event under the plan or contract.”

The Handbook Guideline recognizes that the specified distribution events under section 403(B) 8, the rollover provision of section 403(B) were repealed effective with the UCA '92. The Handbook Guideline further recognizes that section 403(B) 11 is the early distribution provision and, as such, has no application to eligible rollover distributions. The Handbook Guideline, therefore, properly assigns the nature of the distribution event, for rollover purposes, to the “plan or contract”.

The clear intent of the statutory repeal of the rollover events under 403(B) 8 was to eliminate the universality of these specified rollover distribution events by leaving it up to the individual 403(B) plan or contract to decide on the specificity of the distribution events in order to have an eligible rollover distribution.

Is it not ludicrous to require an early distribution triggering event (death, disability, separation from service, attainment of age 59.5 or in the case of hardship*) under Section 403(B)(11) in order to effectuate a rollover distribution to another TSA which is subject to the same early distribution triggering events under Section 403(B)(11)? Is this not the very reason why the UCA '92 eliminated the mandatory triggering events under section 403(B) 8 (death, disability, separation from service or attainment of age 59.5) upon which a rollover distribution could be made?

BIFURCATION:

The use of section 403(B) 11 to govern rollovers results in two sets of rollover rules for section 403(B) 1 annuity contracts:

Rule 1: Pre-1989 Amounts:

The early distribution events under section 403(B) 11 did not go into effect until January 1, 1989, therefore, section 403(B) 1 contract balances prior to that date may be rolled over without a rollover distribution event because the rollover distribution events under section 403(B) 8 were repealed under the UCA '92.

Rule 2: Post-1989 Amounts:

Contract balances subsequent to December 31, 1988 may only be rolled over upon satisfying an early distribution event under section 403(B) 11 because the effective date of section 403(B) 11 is January 1, 1989.

CONFLATION:

Section 403(B) 8 is the rollover distribution provision of section 403(B) while section 403(B) 11 is the early distribution provision; they do not conflate. The use of the early distribution events under section 403(B) 11 to govern eligible rollover distributions under section 403(B) 8 renders the repeal of the rollover distribution events under section 403(B) 8 meaningless.

Is there anyone out there that agrees with my position?

Peace,

Joel L. Frank

rollover@optonline.net

*Hardship distributions are no longer eligible for rollover treatment. Code Secs. 402©(4) and 403(B)(8)(B). Internal Revenue Service Restructuring and Reform Act of 1998.

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Continuation:

Point 1. From the enactment of Section 403(B) nearly half a century ago until January 1, 1989 an employee was permitted to make taxable withdrawals from an annuity contract at will and simply pay the tax owed.

Point 2. Revenue Act of 1978 allowed for rollovers to another TSA or to an IRA (P.L. 95-600, Act section 156(a)). These rollovers could only be done, however, by satisfying a rollover distribution event: (death, disability, separation from service or attainment of age 59.5).

Point 3. So from 1978 to 1988 an employee could make a taxable distribution at will but needed to satisfy a triggering event (section 403(B)(8))in order to effectuate a rollover distribution.

Point 4. Tax Reform Act of 1986 (P.L. 99-514) added section 403(b)11 to section 403(B). Now the employee was required to satisfy an early distribution event (death, disability, separation from service or attainment of age 59.5) in order to make a taxable distribution.

Point 5. The UCA '92 eliminated the triggering events for rollover distributions (403(B)8 but retained the triggering events for taxable distributions (403(b)11).

Point 6. In the post UCA '92 era the 403(B) community has used the triggering events for a taxable distribution under 403(b)11 to also govern rollover distributions.