Ask the Expert – Q & A on Plan Terminations

March 17, 2009 (PLANSPONSOR (b)lines) - Feature articles discussing 403(b) plan terminations and Form 5500 filing requirements led to a number of reader questions on the issues. David Levine and David Powell of the Groom Law Group answer those questions in a Q & A on plan terminations.
By PS

Q: The final 403(b) regulations require that plan assets be distributed “as soon as administratively practicabl”‘ after termination of a 403(b) plan. What does “as soon as administratively practicable” mean?
A: The final 403(b) regulations do not define the term “as soon as administratively practicable.” Looking to analogous authority in other contexts, a distribution that occurs as late as 12 months after plan termination may in certain situations still be able qualify as made “as soon as administratively practicable.” See, for example, IRS Rev. Rul 89-87 and IRS Ann. 94-101. However, this determination is fact-based and can vary based on the underlying terms of 403(b) contracts and other administrative rules that, by their operation, cause a delay in the distribution of 403(b) plan assets. – David Levine

Q:  What if there is no successor 403(b) plan, but the plan sponsor instead immediately adopts a 401(k) plan for the same employees previously covered by the 403(b) plan?   

A:  Then distributions on account of plan termination can be made from the terminated 403(b) plan.  Under the final regulations, a 401(k) plan is not a successor plan to a 403(b) plan. – David Powell

Q:  Regarding the requirement that the “employer that sponsored that terminated plan is required to not make contributions to any section 403(b) contract” for 12 months, is this for just employer non-elective contributions, or both employer non-elective and employee elective contributions?  

A:  Both types of contributions are prohibited in order for there not to be a successor 403(b) plan. – David Powell

Q:  If all of the participants in the terminated 403(b) plan terminated employment long ago, so that no contributions to a successor 403(b) plan are made to accounts of individuals who participated in the terminated 403(b) plan during the period 12 months before and 12 months after the date the old plan is terminated, can the terminated 403(b) plan make distributions on account of plan termination?  

A:  Yes.  As long as fewer than 2% of the employees who were eligible under the terminated 403(b) plan as of the date of plan termination are eligible under the successor 403(b) plan, such distributions can be made. – David Powell

Q: If all assets of the terminated 403(b) plan are distributed, what are the obligations for continued filing of Form 5500s?  

A:  A final Form 5500 return must be filed, and the instructions to the Form 5500, available at www.irs.gov , explain how that is done. – David Powell

NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.

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