In Revenue Ruling 2011-7, the Internal Revenue Service (IRS) provided long-awaited guidance addressing the requirements for a plan sponsor to terminate a 403(b) plan and the tax consequences to plan participants of doing so. Particularly, the IRS addresses termination of 403(b) plans consisting of employee deferrals and employer contributions whose assets are invested in individual annuity contracts, custodial accounts and regulated investment companies, as well as termination of a 403(b) money purchase pension plan. The guidance is helpful in administering the final 403(b) regulations, as the specific requirements to terminate a 403(b) plan were not addressed in detail in those regulations.

On February 22, 2011, the Internal Revenue Service (IRS) published Revenue Ruling 2011-7, which provides long-awaited guidance regarding the application of the final 403(b) regulations that were published in 2007. (See Final 403(b) Regulations Offer Planning Opportunities and Some Surprises for Plan Sponsors for a summary regarding the final 403(b) regulations.) The Revenue Ruling clarifies the requirements for a sponsor to terminate a 403(b) plan, as well as the tax consequences to plan participants if the sponsor terminates such an arrangement. In particular, 2011-7 addresses the termination of 403(b) plans consisting of employee deferrals and employer contributions that are invested in annuity contracts, custodial accounts and regulated investment companies. 2011-7 also addresses termination of 403(b) plans structured as money purchase pension plans. While certain of the fact patterns presented in the Revenue Ruling address government 403(b) plans and non-ERISA 403(b) plans, the overall principles of the ruling appear to be intended to apply to all 403(b) plans.