ERISA 403b

[Guest Travis]

I am curious about a 403b account that was opened at a non-profit organization. Several years after the account was opened, the non-profit organization decided to make matching contributions to the account. It is my understanding that the organization failed to file form 5500 for the two years during which they matched. Now I am being told that I must transfer my total account to a new 403b plan that has been established under ERISA guidlines. If I do not, I am told that my 403b account will become taxable. Is this correct? Or can I leave my 403b account with the current provider? I know that I cannot continue contributing to the current provider after December 31, 2008 but I want to leave the funds there and begin a new 403b. Can I do this?

[J Simmons]

A 403b contract needs to be part of an employer's 403b plan only in order to exclude from taxable income of the employee contributions made after 12/31/2008. That is due to Treas Reg 1.403(b)-3(a) and (b)(3), and Treas Reg 1.403(b)-11(a) making the regs applicable after 2008.

Rev Proc 2007-71, section 8, however, suggests that a 403b contract issued in 2005-2008 and only receiving contributions in the year the contract was issued is relieved of the part-of-a-plan requirement of Treas Reg 1.403(b)-3(b)(3) if the employer made a reasonable, good faith effort to include the 403b contract as part of the ER's plan. In light of these conflicting provisions, it would be prudent to take action that satisfies Rev Proc 2007-71.

That reasonable, good faith effort by the ER is satisfied if the ER collects available info from the 403b contract's vendor and notifies the vendor of the name and contact info for the person in charge of administering the ER's 403b plan, so that there may be a coordination of info to satisfy 403b. Alternatively if your ER does not do that, your 403b vendor, before making any loan or distribution from your 403b contract, may contact the ER and exchange info that may be needed by the ER's 403b person in charge of administering the ER's 403b plan.

So there are three ways that your existing 403b contract could satisfy the part-of-a-plan requirement of Treas Reg 1.403(b)-3(b)(3). One, your 403b contract is subjugated to your ER's 403b plan, becoming part of it. Two, your ER collects available info from the 403b contract's vendor and notifies the vendor of the name and contact info for the person in charge of administering the ER's 403b plan. Or three, before making any loan or other distribution from your 403b contract, your 403b vendor contacts the ER's 403b person in charge of administering the ER's 403b plan to exchange whatever info that person needs for purposes of administering the ER's 403b plan.

What your ER is suggesting--that you must subordinate your existing 403b contract to the ER's 403b plan in order to avoid income taxation of it--is not correct. You do not have to do so. A prudent ER would establish a 403b plan that meets Treas Reg 1.403(b)-3(b)(3) and make a reasonable, good faith effort to include all those 2005-2008 403b contracts, so that they do not become taxable for want of being part of a 403b plan that is documented in accordance with Treas Reg 1.403(b)-3(b)(3). But if your 403b contract does not become part of the ER's 403b plan, your 403b contract does not become taxable so long as the ER or the vendor made the reasonable, good faith effort, respectively.

You are however correct that the ER as a practical matter may require you to have a (different) 403b contract under the ER's 403b plan in order to continue contributing, particularly after 12/31/08.