IRS Rules on 403(b) Plan Terminations


In Rev. Rul. 2011-7, to be published on March 7, 2011, the Internal Revenue Service elaborated the circumstances in which a §403(b) plan will be treated as terminated for tax purposes. The 2007 tax regulations under §403(b) permit the distribution of accumulated benefits on plan termination, generally subject to a moratorium on contributions by the plan sponsor and certain affiliates to any §403(b) contract or account from the date to termination until 12 months after distribution of all assets from the terminated plan. In order for a plan to be considered terminated under those regulations, “all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively feasible after termination of the plan.” For this purpose, “delivery of a fully paid individual insurance annuity contract” is treated as a distribution. The §403(b) nonforfeitability requirement must also be satisfied at the date of termination. Treas. Reg. §1.403(b)-10(a).

Rev. Rul. 2011-7 considers the application of these rules to four fact situations, summarized below. The differences in the four situations relate to (i) the type of §403(b) product used to fund the plan, and (ii) the applicability of the ERISA qualified joint and survivor and preretirement survivor annuity (QJSA/QPSA) rules (in Situation 4 only). In each case, the Service ruled that:

-The plan was duly terminated in accordance with §1.403(b)-10(a);

-Values credited under annuity contracts or certificates are not taxable until actually paid to the participant or beneficiary, so long as the contract adheres to the requirements of §403(b) as in effect at the time of delivery of the contract to the participant or beneficiary; and

-All other amounts are currently taxable to the participant or beneficiary, unless rolled over to an IRA or other eligible retirement plan.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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