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March 2, 2011

IRS Issues Guidance on 403(b) Plan Termination Provisions

In Revenue Ruling 2011-7, the IRS begins to clarify how a 403(b) plan can be terminated and how a distribution can occur on a tax-favored basis.  A 403(b) plan can be sponsored by not-for-profit entities and public schools.

To terminate a 403(b) plan, the following must occur:

  1. The plan must provide that the plan can be terminated.
  2. A binding resolution must adopted, affirming that all contributions to the plan will terminate.
  3. All contributions must be fully vested.
  4. Participants must be notified of the plan termination and the tax consequences thereof.
  5. All plan assets must be distributed within 12 months following the plan termination.
  6. The employer must make no contribution to another 403(b) plan, including other 403(b) plans in existence at the point of plan termination, beginning on the date of plan termination, and ending 12 months after the distribution of plan assets.

If these steps are followed, and for ERISA plans, a final Form 5500 is filed, the plan will be deemed terminated. 

The Revenue Ruling goes on to describe four permissible forms of distribution.  Generally, distributions must in the form of an individual insurance annuity contract, or if the distribution is part of a group annuity, an individual certificate must be provided.  Amounts distributed from the plan can be rolled into another qualified retirement plan, or into a traditional Roth IRA.  In each of these instances, the tax-favored status of the money should be preserved until the amount is cashed out.

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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