Termination procedures

[Guest Mr. Kite]

An employer wants to terminate a non-ERISA 403(b) "plan" -- which basically consists of salary reduction agreements and employee annuity contracts with a handful of vendors -- before the 2009 effective date of the regulations, but there's no guidance on what procedures are required. The preamble indicates that the plan must come into compliance, and have a provision for termination, before this may happen, but the "written plan" requirement does not have to be met. I understand that "written plan" is not supposed to mean the same thing as "plan document," so how can a plan include a termination provision without it being in writing? Any thoughts on the steps to take?

I don't expect the plan's vendors will be pleased about the termination, especially as they will need to perform some of the termination actions (such as the 402(f) notice).

[J Simmons]

Are those vendors obligated to the employer to perform the 402(f) notice task? Or is this something that the employer is to do before instructing the vendors to perform the payouts incident to termination of the 403b plan?

[Guest Mr. Kite]

Are those vendors obligated to the employer to perform the 402(f) notice task? Or is this something that the employer is to do before instructing the vendors to perform the payouts incident to termination of the 403b plan?

Section 403(b)(8)(B) assigns the 402(f) reporting assignment to the "payor" instead of the "plan administrator." See also 1.403(b)-7(b)(3).

[TLGeer]

An employer wants to terminate a non-ERISA 403(b) "plan" -- which basically consists of salary reduction agreements and employee annuity contracts with a handful of vendors -- before the 2009 effective date of the regulations, but there's no guidance on what procedures are required. The preamble indicates that the plan must come into compliance, and have a provision for termination, before this may happen, but the "written plan" requirement does not have to be met. I understand that "written plan" is not supposed to mean the same thing as "plan document," so how can a plan include a termination provision without it being in writing? Any thoughts on the steps to take?

I don't expect the plan's vendors will be pleased about the termination, especially as they will need to perform some of the termination actions (such as the 402(f) notice).

What are the employer's future intentions? 403(b)? 401(k)? Nothing?

[Guest Mr. Kite]

Nothing.

[TLGeer]

Nothing.

In that case, I recommend (1) adopt a good plan document, (2) take action to terminate the plan, and (3) direct the payment of benefits in the form of a distribution of the funding vehicles. Basically, you do this by telling the participants, custodians and insurers that you have terminated the plan, have made in-kind distribution of the funding vehicles, and that you have no further role with respect to the funding vehicles. I would include a sentence saying that if the issuer or the participant determines that the in-kind distribution might be taxable, the distribution will not take effect until such time as the funding vehicle is modified or replaced to avoid such taxation-e.g., convert a 403(b) custodial account to an IRA custodial account.