New Guidance on 403(b) Plan Terminations

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Plan sponsors wanting to terminate their 403(b) plans have struggled with a lack of clear guidance on certain key issues since 2007 when IRS regulations specifically authorized 403(b) plan terminations. Some of the termination requirements set out in those regulations – especially those related to distribution of plan assets – have raised difficult questions for some 403(b) plans. A recent revenue ruling from the IRS answers some of these questions.

To terminate a 403(b) plan, the sponsoring employer must satisfy certain basic requirements. The employer must adopt a terminating resolution, amend the plan to provide for its termination, and notify participants. Participants in the plan must be fully vested, and the plan must distribute all assets within a reasonable time following the termination date. An employer that terminates a 403(b) plan generally must refrain from making contributions to any 403(b) arrangements for a specified time period after the termination.

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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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