Participants at the National Tax-Sheltered Accounts Association (NTSAA) 403(b) Compliance Summit identified steps that should be followed for the proper termination of a 403(b) plan:
1. Review your current plan document to determine if plan terminations are allowable. For taxable years after December 31, 2008, the plan would need to contain provisions permitting termination. Please note: Even though your plan may permit a termination, it does not allow the employer to force a participant with an individual annuity contract or custodial agreement to take a distribution. If your current plan is silent on plan terminations, you must amend your document to include the appropriate plan termination provisions.
2. Adopt a binding resolution that establishes a plan termination date, that future contributions will cease, that all benefits will be fully vested to the participant on the termination date, and authorizes the distribution of all assets to each participant as soon as administratively practical after the termination. Please note: You cannot make contributions to any other 403(b) plan for the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan.
3. Submit the resolution to your Board for approval.
4. Notify all:
a. plan participants, (Please note: You may have to locate missing participants who are still in the plan.)
b. beneficiaries,
c. appropriate product providers and
d. TPAs.
5. Provide a 402(f) rollover notice to participants that provides an explanation of the rollover options and applicable tax consequences.
6. Work with the appropriate product providers to distribute all plan assets within 12 months of the plan termination date to participants and beneficiaries. Consider the following issues:
7. Distributions of a fully paid annuity contract are considered a distributable event by the IRS; however, mutual fund individual custodial accounts are still not eligible for a distribution without the direct authorization of each participant. Therefore, you must be assured that the mutual fund company can still maintain the individual custodial accounts as under the 403(b) retirement plan regulations.a. All participants must agree to the distribution and you must have written notice of this agreement. (You may wish to hold distribution requests until you have received all of them.)
b. Are there any penalties (such as surrender charges that may be charged to the participant)?
Checklist for Plan Termination
Plan termination is a process that is both complex and difficult to achieve in the 403(b) world. There are many facets to the law, regulations and vendor products that impact the ability to successfully terminate a plan. The NTSAA says the decision to terminate a plan should be weighed carefully. The checklist below can be used to guide a plan sponsor through this decision making process.
Things to consider before terminating a 403(b):
1. Why do you want to terminate the plan?
2. What is the reason for terminating the plan?
3. Are there other ways to solve the concern without termination?
4. Is a 403(b) an important benefit to your employees? If you terminate the plan, is there another avenue available for employees to save for retirement?
5. Is your 403(b) plan an important recruitment tool?
6. Are there budgetary items to consider?
7. If you terminate the plan you cannot establish a new 403(b) plan for 12 months. Do you have another plan you want to establish in place of the 403(b)?
8. Do you know that employers no longer will be able to use post‐employment vacation and sick days as employer contributions to the plan?
9. What will be the cost to terminate the plan?
10. Do you know all the providers that your participants have used?
11. Are you able to locate all the participants within the plan?
a. In order to successfully terminate your plan, all plan assets must be distributed within 12 months of the plan’s termination date.
b. Participants who terminated service prior to 2009 may not need to be included.
c. Will participants agree to the distribution?
d. Do the underlying investments have any penalties associated with a distribution?
e. Could you hold onto all the distributions requests until you receive all of them? You may need to do this in order to ensure all participants agree to the distribution.
f. If you cannot hold on to the distributions and all of them are not completed within the 12‐month time period, some of them may be ineligible distributions and may result in ineligible rollovers.
12. Is your plan document up‐to‐date?
a. Your plan documents must have all amendments and restatements up‐to‐date in order to terminate.
i. Check with your document provider to see if they offer a Termination Amendment and to assure that all required amendments have been made through the date of the termination.
13. Are all contributions current and invested in the plan?
a. You must have all contributions invested before you are able to terminate your plan.
i. Unused vacation and sick pay must be paid into the plan prior to termination. This task may be difficult if the total amount due to unpaid vacation or sick pay exceeds the maximum annual contribution limit.
14. Are there any vesting schedules?
a. All participant assets must become immediately vested.
b. You must also notify participants of their ability to roll these assets over.
15. Which union contracts might be affected?
a. These plans are employee benefits; would there be any re‐negotiation needed within the union contracts?
16. Are there any state laws to consider?
17. Do the underlying contracts (annuity or custodial) allow for distribution upon plan termination?
c. If it is an annuity contract, will the provider accept the responsibility to maintain these accounts under the 403(b) rules and regulations?a. Some contracts have surrender charges that a participant is not willing to incur.
i. If they are not willing to distribute, you must ensure the contract permits a force out distribution.
b. Some contracts may not have a provision to permit a distribution due to plan termination.