(b)lines Ask the Expert – Transferring Annuity Contracts

April 7, 2009 (PLANSPONSOR (b)lines) - A plan adviser asks: "An employer sponsors an ERISA 403(b) plan that is funded with individual annuity contracts. These individual annuity contracts impose fees or other expenses if the employer elects to transfer the contracts to another vendor. Can the employer roll these contracts to an IRA custodian who will take them?"

Answer from David Powell and David Levine, Groom Law Group, Chartered:

This question raises two general issues.  First, if the plan sponsor wants to move the amount under a contract from one 403(b) vendor to another, it may, under the terms of an individual contract, be prohibited from doing so, at least without the consent of the employee.  A sponsor’s ability to move assets between 403(b) contracts that are still within the “plan” is dependent on the terms and conditions of each individual contract. 

Second, ERISA 403(b) plans may not force terminated employees to take a distribution of an account balance of more than $1,000 (determined aggregating all contracts) until the participant reaches the later of age 62 or normal retirement age.  Even those rules are subject to the terms of the contracts.  At that point, Department of Labor rules on mandatory rollovers should also be followed. 

As such, caution should be exercised before using forced rollovers as a method to exit existing contracts.   And, of course, employers and employees should carefully review any contracts before making contributions.

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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