$5,000 Cash out in 403(b) plans?

[Guest rkaplan]

Do the involutary cash-out rules ($5,000) that apply to qualified plans also apply to 403(B)s? If so, does it depend on the contract wording?

Does it matter if the plan is an ERISA plan or not?

Are there different rules that apply to deferrals versus employer contributions?

[Guest Clain]

As with qualified plans, the cash out rules will only apply if the 403(B) has a plan document that contains the relevent provisions. However, very few 403(B) plans have documents, instead relying solely on the annuity contract or custodial agreement provisions. This is especially true where an employer is only acting as the conduit to forward deferrals to an insurance or mutual fund company. I have yet to see a contract or agreement that contains the $5k cash out rule, since this implies employer responsibility and potentially ERISA issues.

In general, if a 403(B) plan has a plan document it will be subject to ERISA. However there are the exceptions for governmental employers (typically school districts and universities) and church plans who have not positively elected to be subject to ERISA.

[Guest RJT]

The presence of a plan document is NOT determinative of a plan's ERISA status. I have seen a significant number of non-ERISA plans with plan documents. The key is that discretion in control over the arrangement is not reserved to the employer in the document. Indeed, one of the purposses of the non-ERISA plan doc is to help establish the employer's lack of discretion. The document will specify that the employer won't make loan or hardship decisions, that any questions re the benefit will be resolved by the carrier, and other such things.

Along these lines, though, if a plan DOES incorporate the $5000 cash out rule, it is exercising discretion and will be subject to ERISA unless a governmental or non-electing church. Then ERISA 203(e) applies (the corollary to 411(a)(11)) which never applies to 403(B) plans). The real challenge will be a practical one. A lot of custodial accounts and annuity contracts won't allow an employer access to the contract or account to force such a distribution. Indeed, security laws may actually prevent it if the annuity is a variable one.