(b)lines Ask the Experts – Vesting Upon a 403(b) Plan’s Discontinuance of Contributions

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning 403(b) plans and regulations.

“I’ve seen inconsistent treatment as to whether in a 403(b) plan a complete discontinuance of contributions requires full vesting of affected participants in employer matching and/or nonelective contributions. What do the Experts say?”


Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:


Well, the reason you may have seen treatment that you describe as inconsistent is that the Experts believe the application of vesting requirements to 403(b) plans is very different than for 401(a) plans and may depend on the type of 403(b) plan.


For Employee Retirement Income Security Act (ERISA) 403(b) plans, ERISA Section 203 and its related regulations do not address a discontinuance of contributions. There is a Code section that addresses this issue (Section 411(d)(3)(B)), as well as regulations under that section and pre-ERISA rules for governmental and church 401(a) plans, but those do not apply to 403(b) plans. Instead, 403(b) plans are subject to a nonforfeitability requirement under Code section 403(b)(1)(C). The 403(b) regulations explain how that requirement works with a vesting provision, but do not refer to complete discontinuance of contributions. The definition of fully vested or “nonforfeitable” under the 403(b) regulations is “as defined in regulations under section 411”, but picking up the definition of what it means to be vested (“an unconditional right”) would not necessarily pick up all the rules applicable to 401(a) plan vesting or the rest of the 411 regulations. 403(b) plans are, however, required by IRS ruling to vest on plan termination.


For non-ERISA governmental and church 403(b) plans, only the 403(b) nonforfeitability provision and the ruling on plan terminations expressly apply vesting requirements. Thus, there is no clear guidance that full vesting of employer contributions is required in the event of a complete discontinuance of 403(b) plan contributions. You will not find it expressly mentioned in the lists of required modifications (LRMs), for example. Of course, one of the reasons the issue rarely comes up is that complete discontinuance of contributions (which is itself a facts and circumstances determination, though the IRS has some rules of thumb), as opposed to a temporary cessation of discretionary contributions, is itself rare, and plans often vest all participants when frozen anyway.



NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.


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