Stopping installment payments?

403(b) Plan allows for installment payments to terminated participants. No other partial withdrawals are allowed.

Participant started installments two years ago and wants to stop.

What are his options?  Must he now take the entire amount?  He can't just stop right?  Otherwise that would be a loophole around no partial withdrawals.

Document is silent on stopping installments.

It appears that a clarifying amendment is in order to implement the desired policy.

I'm no too keen on adding something like that to a pre-approved document.

I'm surprised no one ever had this situation come up before.

Well, just to muddy these waters a bit.  We are a recordkeeper and have multiple pre-approved documents for use by our clients (plan sponsors)  Ever since EGTRRA, the IRS (or at least the reviewer of our 401(a)/401(k) document has MANDATED that the document contain language that PROHIBITS the deceleration of installments (including stopping them), once started, and has insisted on language that MANDATES that installments be calculated based on life expectancy at the time first taken (i.e. you can't setup installments for a fixed period of time (even if les than life expectancy).  We argued, Relius says they argued (we are a major modifier of their docs) to no avail.  The reviewer indicated that any flexibility would/could be a violation of the RMD rules, and therefore is not allowed (even though the RMD section clearly overrides any other distribution form, when required).  Interestingly, there is no such provision in the 401(b) plan.  Consequently, our document specifically precludes cessation of installments, and requires any change in installments to be a single lump sum of the balance (or arguably higher installment amounts - but that isn't clear.)  Presumably, anyone else using the Relius document also has this provision - as it was in their off-the-shelf version before our modification.

I think the IRS is full of it.  Groom Law agrees with us, and since the reviewer is now retired, we intend to try again in the next (k) restatement.  Unfortunately, we a re locked into what the document says, and even if allowed (as I believe it is), to do so would be failure to follow the terms of the document....

Even if the § 403(b) plan BG5150 mentions might be stuck with text of the kind MoJo describes (and BG5150 tells us the “[d]ocument is silent on stopping installments”), a plan’s administrator might consider some other points, including:

The text likely grants the administrator a discretionary power to interpret the plan, perhaps including the whole of the plan’s governing documents.

One might interpret the plan to recognize that § 401(a)(9) rules permit a § 403(b) participant to meet her minimum distribution regarding all her § 403(b) contracts with a distribution from any of them, even a contract held under a plan other than the plan the employer/administrator administers.

One might harmonize an interpretation of a restraint on a form of distribution with one or more provisions about how a § 403(b) participant meets her § 401(a)(9) minimums.

This is not advice to anyone.

MoJo, I recognize your frustrations about the IRS’s nonsense with IRS-preapproved documents.

22 hours ago, MoJo said:

Presumably, anyone else using the Relius document also has this provision - as it was in their off-the-shelf version before our modification.

MoJo, where in the Relius doc is that provision?

In our version of the 403(b) Plan adoption agreement (Volume Submitter), there are these options for post-severance distributions.  The one's with X's were the ones chosen.  The second one seems to eliminate any 401(a)9 issues.

(X) Lump Sum

Installments only for RMD

(X) Installments

Ad Hoc (partial)

Custom

On 7/8/2024 at 8:54 PM, MoJo said:

Well, just to muddy these waters a bit.  We are a recordkeeper and have multiple pre-approved documents for use by our clients (plan sponsors)  Ever since EGTRRA, the IRS (or at least the reviewer of our 401(a)/401(k) document has MANDATED that the document contain language that PROHIBITS the deceleration of installments (including stopping them), once started, and has insisted on language that MANDATES that installments be calculated based on life expectancy at the time first taken (i.e. you can't setup installments for a fixed period of time (even if les than life expectancy).  We argued, Relius says they argued (we are a major modifier of their docs) to no avail.  The reviewer indicated that any flexibility would/could be a violation of the RMD rules, and therefore is not allowed (even though the RMD section clearly overrides any other distribution form, when required).  Interestingly, there is no such provision in the 401(b) plan.  Consequently, our document specifically precludes cessation of installments, and requires any change in installments to be a single lump sum of the balance (or arguably higher installment amounts - but that isn't clear.)  Presumably, anyone else using the Relius document also has this provision - as it was in their off-the-shelf version before our modification.

I think the IRS is full of it.  Groom Law agrees with us, and since the reviewer is now retired, we intend to try again in the next (k) restatement.  Unfortunately, we a re locked into what the document says, and even if allowed (as I believe it is), to do so would be failure to follow the terms of the document....




On a related note, if your business is handling client payments or subscription services, using a reliable payment gateway website like A-Pay can help streamline transactions, ensure security, and maintain compliance, making your operations much smoother while keeping focus on your core responsibilities.

I see what you’re saying, and it makes sense why you feel stuck. The IRS reviewer’s strict interpretation of RMD rules has clearly forced your hands, even if, logically, the plan should allow more flexibility. It sounds like the real issue is the language in the document itself, rather than the underlying rules, which is frustrating because it limits what you can do for plan participants. Waiting for the next restatement seems like the only practical option for now, but it’s definitely worth pushing back and making sure the updated language reflects the flexibility you and Groom Law believe is allowed. Until then, following the document to the letter is unfortunately the safest course.

Mojo - I speculate that such a provision wasn't mandated in the 403(b) document(s) due to the fact that there are about a gazillion existing individual annuity contracts issued under state laws/regulations in these plans, with some wildly different provisions, and it would be pretty nearly impossible to make this workable. Just a random thought that crossed my mind.