Freezing a 403(b) Plan - Vesting Required?

[Guest cphcs]

If a 403(b) plan is frozen, must participants be vested in any nonvested matching and nonelective employer contributions in the same way that participants must become vested in a frozen qualified profit sharing plan?

[rcline46]

Since when are participant's required to be 100% vested in a frozen profit sharing plan?

[John Feldt ERPA CPC QPA]

Under 411(d)(3)(B), discontinuance of contributions. Not much guidance to officially tell us exactly what that means, however.

[Guest cphcs]

Any other thoughts on this? I don't think Code section 411 applies to 403(b) plans, so the requirement for vesting upon discontinuance would not appear to apply.

By the way, a plan with employer contributions would of course be subject to ERISA, but I don't find an ERISA requirement for vesting upon discontinuance either.

[oldman]

The regulation governing this states that a facts and circumstances test is applied to determine whether a suspension of benefits has occurred, in which case vesting is not required, or a complete discontinuance of contributions has occurred, whcih requires vesting. Treas. Reg. §1.411(d)-2(d). I was unable to find any further published IRS guidance on this issue. I suggest one look at the larger picture, of what is involved with the contribution "freeze", i.e., the facts and circumstances. If it is part of a documented program to eventually lead to a plan merger or restructuring of the plan, then one can argue that it is a suspension. If it is being dione soley to avoid further benefit accruals until a decision is made on what to do with the plan, then it is probably is a complete discontinuation of contributions.

Of course, this is a legal judgement that the plan sponosr msut make after consulting with its counsel.

[TLGeer]

Any other thoughts on this? I don't think Code section 411 applies to 403(b) plans, so the requirement for vesting upon discontinuance would not appear to apply.

By the way, a plan with employer contributions would of course be subject to ERISA, but I don't find an ERISA requirement for vesting upon discontinuance either.

Correct. The qualified plan rule is solely a qualification requirement.

Remember that the 403(b) rules only apply to vested amounts in the first place. Nonvested amounts are in some odd suspense status, not technically part of the "contract" that is regulated by 403(b). For example, Regs. 1.403(b)-10(a) includes the following sentence: "To the extent a contract fails to satisfy the nonforfeitability requirement of §1.403(b)-3(a)(2) at the date of plan termination, the contract is not, and cannot later become, a section 403(b) contract." This is inconsistent with the notion that vesting is required, so we don't have to argue this point simply from the absence of anything mentioning vesting on a freeze.

In the case of a frozen, rather than a terminated, plan, the plan still exists, so that the above-quoted sentence doesn't apply. This means that participants can continue to vest. They can also be given accelerated vesting. Theoretically, they could stop vesting. Somebody has to do a careful review of the terms of the plan to see (a) what effects would result under the plan as written, and (b) what amendments are permitted or prohibited. I can imagine a variety of outcomes from such a review.

Tom Geer

P.S. A plan with employer contributions other than a church or governmental plan would be subject to ERISA.

[Kevin C]

Don't the Treasury Regulations under Section 411 also apply under ERISA as a result of Section 101 of the Reorganization Plan No. 4 of 1978? The Reorganization Plan transferred the DOL's authority to issue regulations under certain ERISA sections, including the minimum vesting standards, to the Treasury Dept.

EMPLOYEE RETIREMENT INCOME SECURITY ACT TRANSFERS

Section 101. Transfer to the Secretary of the Treasury

Except as otherwise provided in Sections 104 and 106 of this Plan,

all authority of the Secretary of Labor to issue the following described

documents pursuant to the statutes hereinafter specified is hereby

transferred to the Secretary of the Treasury:

(a) regulations, rulings, opinions, variances and waivers under

Parts 2 [29 U.S.C. 1051 et seq.] and 3 [29 U.S.C. 1081 et seq.] of

Subtitle B of Title I and subsection 1012© [set out as a note under 26

U.S.C. 411] of Title II of the Employee Retirement Income Security Act

of 1974 (29 U.S.C. 1001 note) (hereinafter referred to as ``ERISA''),

EXCEPT for sections and subsections 201, 203(a)(3)(B), 209, and

301(a) of ERISA [29 U.S.C. 1051, 1053(a)(3)(B), 1059, and 1081(a)];

(b) such regulations, rulings, and opinions which are granted to the

Secretary of Labor under Sections 404, 410, 411, 412, and 413 of the

Internal Revenue Code of 1986, as amended [26 U.S.C. 404, 410, 411, 412,

and 413], (hereinafter referred to as the ``Code'').

EXCEPT for subsection 411(a)(3)(B) of the Code [section

411(a)(3)(B) of Title 26] and the definitions of ``collectively

bargained plan'' and ``collective bargaining agreement'' contained

in subsections 404 (a)(1)(B) and (a)(1)©, 410(b)(2)(A) and

(b)(2)(B), and 413(a)(1) of the Code [26 U.S.C. 404(a)(1)(B) and

(a)(1)©, 410(b)(2)(A) and (b)(2)(B), and 413(a)(1)]; and

© regulations, rulings, and opinions under subsections 3(19),

3(22), 3(23), 3(24), 3(25), 3(27), 3(28), 3(29), 3(30), and 3(31) of

Subtitle A of Title I of ERISA [29 U.S.C. 1002(19), (22), (23), (24),

(25), (27), (28), (29), (30), and (31)]. [As amended Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095.]

Here is a link to Reorganization Plan No. 4

http://benefitsattorney.com/modules.php?na...wpage&pid=7

[TLGeer]

Don't the Treasury Regulations under Section 411 also apply under ERISA as a result of Section 101 of the Reorganization Plan No. 4 of 1978? The Reorganization Plan transferred the DOL's authority to issue regulations under certain ERISA sections, including the minimum vesting standards, to the Treasury Dept.

EMPLOYEE RETIREMENT INCOME SECURITY ACT TRANSFERS

Section 101. Transfer to the Secretary of the Treasury

Except as otherwise provided in Sections 104 and 106 of this Plan,

all authority of the Secretary of Labor to issue the following described

documents pursuant to the statutes hereinafter specified is hereby

transferred to the Secretary of the Treasury:

(a) regulations, rulings, opinions, variances and waivers under

Parts 2 [29 U.S.C. 1051 et seq.] and 3 [29 U.S.C. 1081 et seq.] of

Subtitle B of Title I and subsection 1012© [set out as a note under 26

U.S.C. 411] of Title II of the Employee Retirement Income Security Act

of 1974 (29 U.S.C. 1001 note) (hereinafter referred to as ``ERISA''),

EXCEPT for sections and subsections 201, 203(a)(3)(B), 209, and

301(a) of ERISA [29 U.S.C. 1051, 1053(a)(3)(B), 1059, and 1081(a)];

(b) such regulations, rulings, and opinions which are granted to the

Secretary of Labor under Sections 404, 410, 411, 412, and 413 of the

Internal Revenue Code of 1986, as amended [26 U.S.C. 404, 410, 411, 412,

and 413], (hereinafter referred to as the ``Code'').

EXCEPT for subsection 411(a)(3)(B) of the Code [section

411(a)(3)(B) of Title 26] and the definitions of ``collectively

bargained plan'' and ``collective bargaining agreement'' contained

in subsections 404 (a)(1)(B) and (a)(1)©, 410(b)(2)(A) and

(b)(2)(B), and 413(a)(1) of the Code [26 U.S.C. 404(a)(1)(B) and

(a)(1)©, 410(b)(2)(A) and (b)(2)(B), and 413(a)(1)]; and

© regulations, rulings, and opinions under subsections 3(19),

3(22), 3(23), 3(24), 3(25), 3(27), 3(28), 3(29), 3(30), and 3(31) of

Subtitle A of Title I of ERISA [29 U.S.C. 1002(19), (22), (23), (24),

(25), (27), (28), (29), (30), and (31)]. [As amended Pub. L. 99-514,

Sec. 2, Oct. 22, 1986, 100 Stat. 2095.]

Here is a link to Reorganization Plan No. 4

http://benefitsattorney.com/modules.php?na...wpage&pid=7

No. The authority is to issue regulations as to statutory provisions contained in both ERISA and the Code. The classical illustration is the issuance of hours of service regulations by DOL that apply under both ERISA and the Code.

Code 411(d)(6) provides the rule for vesting on partial termination, and has no counterpart in ERISA or 403(b). Therefore, there is no ERISA provision to which Treasury Regulations under 411 could apply.

Tom Geer

[Guest cphcs]

Great comments. Very much appreciated.

Another thought: Due to the awkward status of 403(b) contributions at termination (potential vesting to the participant if not vested), I think it makes sense for a 403(b) plan to provide for full vesting at termination - even if not technically required - to avoid a bad result for participants. However, I don't think a freeze would be implicated by such plan language (depending of course on how the plan is drafted).