Frozen 403(b) plans

[pbarrett]

We did an amendment to freeze a 403(B) plan effective 12/31/98 and then established a 401(k) plan for the employees. It is our understanding we cannot terminate the 403(B). I am wondering now if the 403(B) monies should all be considered 100% vested, does anyone have an opionion? Also, aside from filing the 5500, should we be providing an annual statement to all the participants in the frozen 403B plan? They are receiving a statement from the insurance company that reflects gains etc. Please help. This is our only 403B plan and we are really in the dark with all the rules and regs. Thanks.

[pbarrett]

You know, I was wondering if anyone at this point would have a response to an old question I put out there.

Distributions were made from the frozen 403(b) plan. We are of the opinion the distributions should have been paid on a 100% vested basis. The Trustees opted to forfeit balances. They now have a sizeable amount sittiing in their 403(b) forfeiture account. We believe the funds should be refunded the the participants with earnings.

This plan was frozen 12/31/98. A 401(k) plan was establised 1/1/99. We handle the 401(k) plan.

This issue came up because the Trustee phoned and wanted to know if they could pay our 401(k) admin bill from the 403B forfeiture account. "He has quite a bit of cash there and thought he should start using it."

Is it Friday yet?

[mbozek]

Maybe I dont get it but how can a 403(b) plan have a forfeiture account if the plan does not have assets. All of the contributions are held in accounts/ annuities owned by each participant. Therefore a 403(b) plan does not have trustee. While part of the account can be subject to forfeiture under the terms of the plan, there is no plan forfeiture account since there is no trust holding assets of the 403(b) plan. 403(b) plan forfeitures retained under an ERISA plan become plan assets which must be held in trust for the exclusive benefit of the plan participants if not otherwise distributed. The fiduciary cannot use the funds to pay expenses of another plan even if it covers the same participants.

The plan admin should consult counsel to to determine the best course of action. By the way what did the 403(b) plan document say should be done with forfeitures??

[GBurns]

Aren't there many 403(b) plans that have an employer contribution that is subject to a vesting schedule?

If this is so, What happens to the unvested money when either the employee terminates or as above the plan is frozen? The money does not belong to the participant (or ex) and some posters seem to be saying that it does not belong to the employer and it does not belong to the plan since there is no Trust and no forfeiture account etc. So to whom does this belong and Why is is not an asset?

[mbozek]

Good plan drafting provides for reallocation of the forfeitures among the remaining participants as of the end of the year or use them to reduce the er's contributions for the year. This avoids the issue of retaining forfeitures.

[pbarrett]

The employer is the plan administrator. Sungard Corbel just recently updated the document to add the Gust and Egttra amendments.

Employer contributions are subject to a vesting schedule. As the first page of Corbel's doc says, the plan was frozen 12/31/98. Forfeitures, per the doc, are first to be used to pay plan expenses and then to be added to the match.

If you did not catch the one sentance that the plan was frozen, you'd think this was an active plan.

The employer, in fairness, thinks he's done everything ok. I will be referring him out to seek his own legal counsel but I am curious about the plan being frozen. The employers claims he is following the provisions of the plan. There has been no match (and there will be no match because it is frozen) so the money is all sitting there. I know he cannot pay the 401(k) fees, but it wasn't a bad thought on his part.

My real question is: shouldn't the employer match dollars have been considered fully vested as soon as the plan was frozen??? The plan cannot be terminated according to Legal because there is no provision to terminate a 403B plan in the code. We have an opinion from a legal firm (dated 10/98) who specializes in 403(b)'s.

Again, I'm more curious than anything else.

If anyone works with these plans, I'd appreciate any input you can give.

Thanks so much.

[ljr]

We're a bank trust department that was custodian of an ERISA 403(b) plan with only 3 participants remaining. The employer could not merge the 403(b) into their 401(k) and could not distribute to the participants who were still employed. What they finally did was transfer each participants account to a 403(b) account with a mutual fund company selected by the participant. Then the custodial account with us held no further assets and was closed. Each participant ended up with their own account and the employer was done with the 403(b) once they filed the final 5500. Everyone was fully vested so we didn't have to deal with that issue.

[mbozek]

There is no termination procedure for 403(b) plans because there are no assets to distribute to participants since they own the annuity/ custodial accounts. When a 403(b) plan is terminated the plan sponsor should decide how to handle any non vested assets either by fully vesting the assets or using the assets to pay plan expenses. Nobody thought through what should be done when the plan was terminated. One option would be to distribute the surplus to the participants by transferring them to the participant's accounts. Only other option would be to amend the plan to provide for reversion of the assets to the employer on the grounds that the employees had no vested right to the funds. see ERISA 403(d).

[Lori Foresz]

Hi,

This is in response to LJRs comment in which the amounts were transferred to 403(b) account at mutual fund companies and a final Form 500 was filed. What is the basis for the final Form 5500? Doesn't the 403(b) plan still exist it just is now in MFs?

Our issue is we have a 403(b) plan that was actually terminated via resolution and we want to file a Form 5500. Was it legal to adopt a resolution to terminate the plan?

If not, what does a sponsor do, just continue filing a Form 5000 forever, even with no participants in the plan?

Just curious.

Thanks

[Guest bpatt]

When I came to my current company in 1996, we had three separate retirement plans: (1) a 403(b) for employees of our not-for-profit entities, (2) a 401(k) for our for-profit entites, and (3) a Profit Sharing Plan for all employees. Each plan had different plan documents and different rules. Many employees had accounts in all three plans as they had transferred between not-for profit and for-profit entities.

To simplify things for our employees, we chose to terminate the 403(b) plan in and merge the 401(k) and Profit Sharing plans effective January 1, 1998. One hitch...Our 403(b) plan document said the plan could be terminated and the assets could be distributed to the participants. When I instructed the company that administers the plan for us to do this, I was told the plan could not be terminated, only frozen.

I have been trying for years to find a way to eliminate this plan. From what I'm reading here, we could require our employees could set up "individual" 403(b) plan with a mutual fund company of their choice and transfer the funds to this account. Is that true? If so, can you suggest some mutual fund companies?

[ljr]

Yes, you can have employees transfer their 403(b) money to 403(b) accounts at a mutual fund company of their choice. We had a small plan that did this last year. I'd be careful of making a recommendation here as to which mutual fund company - fiduciary responsibility and all that. As to mutual fund companies, the following have good reputations: Vanguard, American Funds, Fidelity. As usual, you should get advice from your ERISA counsel.