Originally published in the Tax Management Compensation Planning Journal, 39 CPJ 227, 11/04/2011.
In July 2007, the Internal Revenue Service (IRS) issued final regulations (the ‘‘Final Regulations’’) under §403(b) of the Internal Revenue Code of 1986, as amended (the Code), which generally took effect for taxable years beginning after December 31, 2008. The Final Regulations required significant changes to the rules that apply to tax-exempt organizations, public schools and churches that maintain tax-deferred retirement plans under Code §403(b) (referred to herein as ‘‘403(b) plans’’), and in most instances, required employers to amend and update their 403(b) plans and consider modifications to their related administrative practices. Among a long list of new rules and requirements that the Final Regulations brought to the 403(b) arena was a definitive provision permitting 403(b) plans to be formally terminated and terminal distributions made from such plans.
Prior to the Final Regulations, there had been no legal guidance regarding how, or even if, a 403(b) plan could be terminated. Although 403(b) plan terminations were likely occurring during the pre-Final Regulations era (there was no express legal rule prohibiting such plan terminations), many employers and employee benefit practitioners viewed the lack of legal guidance on 403(b) plan terminations as a barrier to terminating such plans. So, 403(b) plans that were no longer wanted or needed often remained ‘‘frozen’’ with no new contributions or enrollment, but sometimes became a thorn in an employer’s side as the plan that just would not go away. Administratively, and sometimes even financially, this result was burdensome to employers....
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