Steps in Terminating a 403(b) Plan
The legal firm first noted in its One Minute Memo that as a threshold matter, a significant impediment for many employers wanting to terminate a 403(b) plan may be the 24-month prohibition, reiterated in the recent revenue ruling, from contributing to another 403(b) contract 12 months before and 12 months after distribution of all of the assets under the terminated plan. There is a limited exception if fewer than 2% of the employees who were eligible under the terminating plan are eligible under another 403(b) plan.
However, Seyfarth said, assuming the employer clears this hurdle and the 403(b) plan document allows for termination of the plan, the employer first must select a termination date and adopt a binding resolution to:
- cease future purchases of annuity contracts under the plan and terminate the plan effective on the selected termination date,
- provide for 100% vesting of any employer contributions as of the termination date, and
- direct all benefits to be distributed as soon as practicable after the termination date.
Two notices must then be distributed in connection with the termination of a 403(b) plan. First, all participants and beneficiaries in the plan must be notified of the plan termination, which may raise the challenge that exists with many plan terminations of locating missing participants. Second, when the assets are distributed, employees must be notified of their rollover rights. (Former employees received a rollover notice when they terminated employment).
Finally, the employer must file a final Form 5500 if the plan is subject to the Employee Retirement Income Security Act (ERISA).
According to the memo, assets in a 403(b) plan funded through individual contracts, a group contract, and/or custodial account will remain sheltered from tax after the plan’s termination until withdrawn by the participant or beneficiary if they are distributed as described in Revenue Ruling 2011-7 (see What the IRS Guidance on 403(b) Plan Terminations Means and Plan Termination Guidance Addresses Unanswered Questions).
Provider Role
Seyfarth noted that the insurance carriers and custodial account providers also have a role in 403(b) plan terminations, e.g., permitting rollover distributions and ensuring the contracts following termination remain in compliance with Code Section 403(b) as it existed on the date of the plan’s termination. However, ongoing administration of the contracts as terminated will not involve the same responsibilities required under an active plan, as no further contributions will be made to the contracts. This will eliminate the need to monitor contribution limits or sign new information sharing agreements to verify employment status or coordinate loan applications.