403(b)(1) In-Service Distributions

[oldman]

A 403(b)(7) plan has employer matching and employer nonelective contributions in addition to elective deferral contributions. The plan doesn't permit age 59-1/2 and hardship withdrawals. The plan is transferrring to a 403(b)(1) annuity contract and would like to allow 59-1/2 withdrawal from all accounts and hardeship distributions of elective deferral contributions.

Can the plan add the in-service distribution provisions going forward under the annuity contract?

[TLGeer]

As to existing amounts, Regs. 1.403(b)-10(b)(2)(i)© lists as a requirement for a contract exchange within a plan that "The other contract is subject to distribution restrictions with respect to the participant that are not less stringent than those imposed on the contract being exchanged, and the employer enters into an agreement with the issuer of the other contract under which the employer and the issuer will from time to time in the future provide each other with the following information: (1) Information necessary for the resulting contract, or any other contract to which contributions have been made by the employer, to satisfy section 403(b), including information concerning the participant’s employment and information that takes into account other section 403(b) contracts or qualified employer plans (such as whether a severance from employment has occurred for purposes of the distribution restrictions in §1.403(b)-6 and whether the hardship withdrawal rules of §1.403(b)- 6(d)(2) are satisfied)." (The last part is the dreaded and loathed ISA.)

There is no support for segregating amounts transferred (earnings-adjusted) from subsequent contributions (earnings-adjusted) and allowing expanded distribution rights as to the latter. In fact the language quoted above is phrased in terms of the contract, not the account or sub-account. Further, Regs. 1.403(b)-10(b)(2)(iii) explicitly provides that compliance with © cited above is subject to subsequent guidance by the IRS, but none has been issued.

The result is nonsensical, given that tracking pre- and post-transfer amounts is pretty easy, so I looked at the definitions and effects provisions under 403(b) to try to finagle a way out by finding a narrower use of the term contract. No help there, since the general use of the term includes all of a participant's rights under the plan, a broader definition.

I'd really like to be wrong on this, so any disagreements from others are more than welcome.

Tom Geer