Disqualification of School system 403(b) Plan

[Belgarath]

I have the following excerpt from an old write-up. Can't recall the name of the firm that posted it. Maybe "Plan Sponsor" ? Any opinions as to whether this is still accurate?

The final 403(b) regulations do not state conditions under which an entire 403(b) plan would lose its tax-qualified status and thus fail to be a 403(b) plan. However, the final regulations do list  three situations where all of the contracts in a 403(b) plan would not be section 403(b) contracts, as follows: 

a)      If the employer fails to have a written plan which, in form, satisfies 403(b) (plan document requirement); 

b)      If the employer is not an employer eligible to sponsor a 403(b) plan; and
c)      If a plan fails to satisfy the nondiscrimination rules (including the universal availability requirement for elective deferrals).

Well, if they are not section 403(b) contracts, what are they? They become nonqualified annuity contracts under Section 403(c), where the contributions (but interestingly, not the earnings), would become taxable to employees. Note that, though it is not entirely clear, it is presumed that custodial accounts would be treated the same as annuity contracts for this purpose, since 403(b)(7)(A) of the Code treats contributions to a custodial account as amounts contributed to an annuity contract.

[Peter Gulia]

Instead of looking to a secondary source, it might be simpler to read the Treasury’s rule.

It includes a subsection on “Effect of failure”. 26 C.F.R. § 1.403(b)-3(d) https://www.ecfr.gov/current/title-26/part-1/section-1.403(b)-3#p-1.403(b)-3(d).

About a failure, Treasury’s rule sends you to Internal Revenue Code sections 61, 72, 83, 402(b), and 403(c).

A 403(b)-failed annuity contract still might be an annuity contract. While a contribution that gets no § 403(b) exclusion counts in income, a build-up under an annuity contract might not be taxed until paid, distributed, or made available. See 26 C.F.R. § 1.403(b)-3(d)(1)(i)-(iii).

26 C.F.R. § 1.403(b)-3(d)(1)(ii) describes which failures affect a whole plan, which affect a class of individuals, and which affect only a particular individual.

[Belgarath]

Thanks Peter!!