The IRS provided some additional guidance of considerations when terminating a 403(b) plan in their Spring 2011 Edition of Retirement News for Employers. It accompanies their Revenue Ruling 2011-7, which provides examples of how to terminate a 403(b) retirement plan funded in various ways and discusses when terminated plan distributions may be taxable. You can click on the links above to read the information in its entirety, but here is a summary of considerations when terminating a 403(b) plan:
Step 1: Adopt a binding resolution that establishes a termination date, stops contributions, makes all benefits fully vested at that date, and authorizes the distribution of all participant accounts.
Step 2: Although there are some exceptions, you typically stop making contributions to any other 403(b) plan from the termination date through one year after all benefits have been distributed from the terminated plan.
Step 3: Notify plan participants of the plan’s termination.
Step 4: Provide a 402(f) rollover notice to participants. The IRS requires that each participant is provided with a written explanation of their options prior to making a distribution that is eligible to be rolled into another retirement plan or account.
Step 5: Distribute all of the plan’s assets within one year of the termination date. The IRS and DOL advise that the distribution should be made as soon as administratively practicable after the termination date. According to the IRS newsletter, distributions should be made as follows:
• Fully paid individual annuity contracts issued by an insurance company are distributed by delivering the contracts to the individuals, or by single-sum liquidating distributions, if permitted under the contract;
• Group annuity contracts are distributed by issuing individual certificates to the individuals evidencing fully paid contract benefits, or by single-sum payments, if permitted under the contract; and
• Mutual fund custodial accounts are paid by distributing the individual’s account balance (in cash or in kind) to the individual or by a direct transfer, if elected by a participant or beneficiary, to another eligible retirement plan.
Please keep in mind that this is just a summary of consideration and steps taken by the sponsor in a 403(b) plan termination. It’s important that you review the IRS revenue ruling to obtain a comprehensive understanding of how to approach a plan termination and consult your CPA and attorney for additional guidance.
Jessica Puckett, CPA, CFE