403(b) Plan Termination

[oldman]

We have a non-profit organization (Employer A), sponsor of a 401(k) plan and 403(b) plan. The entity acquired a non-profit organization (Employer B) in 2007. Employer B had a 403(b) plan, but contributions ceased to the plan as of the takeover date, and former employees of Employer B then became eligible to participate in Employer A's plans. Is there any reason why Employer B's 403(b) plan cannot be terminated?

[ETA Consulting LLC]

As a rule, no. As a practical matter, there are some rules one various investment structures that may impede the plan's ability to distribute all assets within 12 months of termination. For instance, if everyone has a 403(b)(1) annuity, then you can simply assign the annuity to satisfy the distrbution requirement. However, if a participant is in a 403(b)(7) brokerage account and refuses to take a distribution, then it's not like a 401(k) trust where the trustee directs the distribution to the participant anyway.

So, if all participants are located and on board, then there would be no reason not to terminate the 403(b). The rule changes allowing 403(b) termination to become a distributable event has creates some false expectations with some other rules. It should all get straightened out over the next 50 years

Good Luck!

[mbozek]

As a rule, no. As a practical matter, there are some rules one various investment structures that may impede the plan's ability to distribute all assets within 12 months of termination. For instance, if everyone has a 403(b)(1) annuity, then you can simply assign the annuity to satisfy the distrbution requirement. However, if a participant is in a 403(b)(7) brokerage account and refuses to take a distribution, then it's not like a 401(k) trust where the trustee directs the distribution to the participant anyway.

So, if all participants are located and on board, then there would be no reason not to terminate the 403(b). The rule changes allowing 403(b) termination to become a distributable event has creates some false expectations with some other rules. It should all get straightened out over the next 50 years

Good Luck!

403b7 custodial agreements permit custodian to cash out a participant if the plan is terminated and sponsor no longer pays fees to custodian. Generally custodian will ask participants to rollovefr funds to an IRA or custodian will purchase annuity contract. Custodian cannot be stuck with liability risk for maintaining custodial accounts in accordance with applicable law after plan is terminated and there is no plan administrator to provide instructions to custodian. 403b regs specifically allow plan assets to be distributed to participants by a rollover upon termination of the plan. Also 403b plan needs to distribute all assets in order to be terminated under IRS regs.

Bigger Q is whether B's assets can be distributed after acquisition. Need to review reg 1.403(b)-10(a).

[ETA Consulting LLC]

I understand that, and agree. I was speaking to several state law brokerage issues that an attorney specializing in 403(b) spoke about at ASPPA. I hate that I could not provide more direct detail for lack of understanding, but she spoke of how the Treasury Regs couldn't impact state brokerage laws stating no one other than the account owner may direct that payout. This is where the 403(b) remains different, since that assets aren't in a trust and there is no trustee directing the payout.

This was the jist of her statements. But, I agree with you 1000% on the regulation side and am merely speculating on what a holdup may be. I should've articulated that more clearly in my previous response.

[mbozek]

I understand that, and agree. I was speaking to several state law brokerage issues that an attorney specializing in 403(b) spoke about at ASPPA. I hate that I could not provide more direct detail for lack of understanding, but she spoke of how the Treasury Regs couldn't impact state brokerage laws stating no one other than the account owner may direct that payout. This is where the 403(b) remains different, since that assets aren't in a trust and there is no trustee directing the payout.

This was the jist of her statements. But, I agree with you 1000% on the regulation side and am merely speculating on what a holdup may be. I should've articulated that more clearly in my previous response.

I would like to know what cites the attorney has because it is contrary to the practice in custodial documents used by financial service cos. Every 403b7 custodial account I have reviewed and drafted has a provision that permits the custodian to resign and distribute the funds on 30 days notice or purchase an annuity. No securities lawyer ever objected.

Also the custodian is not regulated under state securities laws subject to the rules that regulate brokers and the resignation by either the custodian or client is a contractual provision that the client agres to in advance. Resignation by the custodian also appears in all IRA agreements. Every custodian wants the ability to resign from an account if it becomes aware that that the account is being used for an illegal or suspicious activity such money laundering or illegal trading to avoid being accused of participating in such activity by regulators.

Finally I dont understand her distinction between a trust and custodian in directing payout. In most Q plans the trustee does not exercise discretion over paying out benefits but only makes payment when directed by a plan fiduciary such as the plan administrator.

[oldman]

Thank you all for your comments. A follow-up question, if you please. Would the termination of Employer B's 403(b) plan run afoul of the successor plan rules of Treasury Reg. Sec. 1.403(b)-10(a):

"A section 403(b) plan is permitted to contain provisions that provide for plan termination and that allow accumulated benefits to be distributed on termination. However, in the case of a section 403(b) contract that is subject to the distribution restrictions in Section 1.403(b)-6© or (d) (relating to custodial accounts and section 403(b) elective deferrals), termination of the plan and distribution of accumulated benefits is permitted only if the employer (taking into account all entities that are treated as the same employer under section 414(b), ©, (m), or (o) on the date of the termination) does not make contributions to any section 403(b) contract that is not of the plan during the period beginning on the date of the plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the period beginning 12 months before the termination and ending 12 months after the distribution of all assets from the terminated plan, fewer than 2 percent of the employees who were eligible under the section 403(b) plan as of the date of the plan termination are eligible under the alternative section 403(b) contract, the alternative section 403(b) contract is disregarded."

[mbozek]

Thank you all for your comments. A follow-up question, if you please. Would the termination of Employer B's 403(b) plan run afoul of the successor plan rules of Treasury Reg. Sec. 1.403(b)-10(a):

"A section 403(b) plan is permitted to contain provisions that provide for plan termination and that allow accumulated benefits to be distributed on termination. However, in the case of a section 403(b) contract that is subject to the distribution restrictions in Section 1.403(b)-6© or (d) (relating to custodial accounts and section 403(b) elective deferrals), termination of the plan and distribution of accumulated benefits is permitted only if the employer (taking into account all entities that are treated as the same employer under section 414(b), ©, (m), or (o) on the date of the termination) does not make contributions to any section 403(b) contract that is not of the plan during the period beginning on the date of the plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the period beginning 12 months before the termination and ending 12 months after the distribution of all assets from the terminated plan, fewer than 2 percent of the employees who were eligible under the section 403(b) plan as of the date of the plan termination are eligible under the alternative section 403(b) contract, the alternative section 403(b) contract is disregarded."

If the only other salary reduction plan in your non profit organization (Employer A) is a 401k plan, termination of the 403b plan of employer B and distribution of accounts will not the eligibility of A's and B's employees to contribute to the 401k plan. This assumes that there is no other 403b plan in A's controlled group.

[oldman]

Employer B's 403(b) plan has been frozen since its takeover by Employer A in 2007 and its employees have been able to participate in both Employer A's 401(k) plan and 403(b) plan. It would appear that since employer contributions have been made to another 403(b) plan of Employer B within 12 months of the proposed plan termination, then Employer B's frozen plan cannot be terminated unless it can be demonstrated that less than 2% of Employer B's employees who were eligible under B's plan were eligible to participate in A's 403(b) plan.