On February 22, 2011, the IRS published Revenue Ruling 2011-7 describing the required procedures for successful termination of a 403(b) tax sheltered annuity arrangement. The U.S. Department of the Treasury issued final regulations under Code Section 403(b) in July of 2007. Under the 2007 regulations it was clear that employers were permitted to amend their 403(b) plans to eliminate future contributions. However, the regulations were far from clear as to how an employer was to complete the termination of a plan, which in many cases consists of a series of individual annuity contracts from different insurance companies and/or 403(b)(7) mutual fund custodial agreements.
Under the new Revenue Ruling four different factual situations were examined. In the analysis of the four situations, the IRS summarizes the requirements for terminating a 403(b) plan:
- The employer must adopt an irrevocable resolution terminating the plan and suspending all future contributions to the 403(b) plan being terminated.
- The employer may not make contributions to any other 403(b) plan for a period of 12 months after distribution of all assets from the terminated plan.
- All accumulated benefits must be distributed to participants and beneficiaries as soon as administratively practicable after the formal resolution terminating the plan is adopted.
- For this purpose, "distribution" includes delivery of a fully paid individual insurance annuity contract or, in the case of a group annuity contract, delivery of an individual certificate evidencing fully paid benefits under the group annuity contract.
- Distributions of cash and liquidation of individual or group annuity contracts or custodial agreements will be taxable income to the recipient unless they are transferred in a directed rollover to another tax-deferred plan or IRA.
- Participants must be notified of the termination and given required tax notices.
For those plan sponsors who froze their 403(b) plans and moved to a 401(k) SIMPLE or SEP, this guidance can be followed to proceed with plan termination. If the employer contributes to another 403(b) arrangement, this guidance suggests that any prior plans cannot be terminated. There are other questions raised by the ruling that will hopefully be answered in subsequent guidance.