Partial Plan Term Rules

[austin3515]

Do the rules regarding partial plan terminations apply to 403bs? For example, if we froze a 403b plan and started up a 401k plan, would that trigger 100% vesting?

It seems to me that those rules (411(d)(3)) appear to apply only to 401a plans.

[Belgarath]

Short answer - I don't know. I think this is further complicated by 1.403(b)-10, referring to 1.403(b)(3) - which gets you to (d)(2) of that section regarding nonforfeitability, ultimately seems to sort of say that amounts that don't satisfy the nonforfeitability provisions aren't 403(b) amounts, but are instead subject to 403© or 401(a).

I haven't done any sort of thorough analysis on this, and if I did, I'm not sure I could find a solidly supportable answer anyway! Going purely with what "feels" right, I'd say the PPT rules apply. I'm most willing to be instructed in why that isn't right, however.

Interesting question.

[Carol V. Calhoun]

I don't know that we even need to get as far as the regulations. 403(b)(1)© provides that in order to be a 403(b) annuity:

the employee’s rights under the contract are nonforfeitable, except for failure to pay future premiums,

Thus, to the extent that rights under the contract are subject to a vesting schedule, they are under 403© rather than 403(b). The regulations are of interest only to the extent that they provide that a contract can be bifurcated, so that the nonforfeitable portion is treated under 403(b) and the forfeitable portion is treated under 403©, rather than treating the whole thing as subject to 403© because a portion is forfeitable.

403© provides that benefits subject to that section are taxable under 83(b). And 83(b) has never required that benefits be fully vested upon termination of the plan.

My sense is that the primary issue is contractual, rather than under the Internal Revenue Code. The plan by its terms presumably said that the amounts would vest on a particular schedule. If, for example, the plan calls for three-year cliff vesting, an employee who had one year of service at the date of termination, but who attained three years of service thereafter, could argue that his or her contractual rights were impaired if the benefits never vested. So if the plan were fully terminated, such that continued vesting was not possible, you would need to fully vest all employees. However, if the plan were merely frozen, such that employees could continue to vest, this would not be an issue.