In re-reviewing the 2007 regulations set to take effect 1/1/2009, I note that the requirement for a plan document is one imposed as a condition for tax-deferred contributions to a 403b contract. That is at least how the regulatory language reads.

I did not find where in the 2007 regs there is an affirmative duty placed on the employer to establish a plan document, even as to an employer that has to date operated a non-ERISA 403b program without a document. Nor did I find anywhere in the 2007 regs where it requires of an employer that might choose to adopt a 403b plan document which 403b contracts the employer must include in and maintain under its 403b plan.

Re-reviewing Rev Proc 2007-71, section 8.01 speaks in terms of the circumstances under which a 403b contract not maintained under an employer's 403b plan yet satisfies the requirement that the 403b contract be maintained under a 403b plan document. That provision is odd in that it assumes generally that a 403b contract not receiving contributions needs to be maintained under a 403b plan document, but the 2007 regs only require such to keep contributions going into the 403b contract tax-deferred.

There is one provision of Rev Proc 2007-71 that suggests that an employer must have a 403b plan document and what 403b contracts be included. Section 8.02 provides "a §403(b) plan will not be treated as failing to satisfy the requirements of §1.403(b)-3(b)(3) if the plan does not include terms relating to those contracts" of employees if by 1/1/2009, the employer is a 'former' employee and no more money goes into the 403b contract. However, no part of Treas Reg § 1.403(b)-3(b)(3) specifies the an employer must have a 403b plan for the 403b contracts of its employees that must be included in an employer's 403b plan.

Again, the only requirement of the 2007 regs seems to be that a 403b contract needs to be maintained pursuant to an employer's 403b plan in order to shield contributions from current taxation.

The 2007 regs permit an employer to stop future contributions, i.e. to freeze its 403b plan. The 403b contracts would not be receiving contributions in 2009 and beyond, and thus not need to be maintained pursuant to an employer's 403b plan. The 403b contract of an employee would simply be a matter administered between the vendor and the employee, per the terms of the 403b contract between them. (It would behoove the vendor and the employee, the parties to that 403b contract, to take whatever steps may be necessary--other than that to be maintained pursuant to an employer's 403b plan--that the 2007 regs otherwise require.)

I'm hoping someone can point me to authority, if there is any, that prohibits an employer that has operated to date (and perhaps through 12/31/2008) a non-ERISA 403b program without a document from simply stopping contributions on 12/31/2008.

Some time ago I read the 403(b) regulations to confirm my guess that, as you say, a plan document is required only as a condition of tax-deferred contributions. For reasons I don't remember, I decided that the 403(b) regs can be read to the contrary.

My guess is that the safe way to satisfy the plan document requirement for a non-ERISA 403(b) plan that will not receive contributions after 2008 and will not terminate in 2008 is to adopt the IRS model 403(b) plan, modify the plan to not allow contributions after some date in 2008, and comply with plan section 7.3 and section 8.01 of RP 2007-71 for all the insurers and custodians who received contributions after 2004. My understanding is that the IRS will not disqualify a 403(b) plan based on an inconsistency between the plan document and a contract or account described in section 8.01 of RP 2007-71 if (1) the employer satisfies the requirements in section 8.01 for the contract or account and (2) the plan includes the override language in model plan section 9.8.

The following from section 8.01, while not clear to me, can be read to condition satisfaction of section 8.01 on the employer's adoption of a plan document:

"the contract will not fail to satisfy § 403(b) for the year merely because the contract is not part of a written plan that satisfies § 1.403(b)–3(b)(3) of the 2007 regulations if the employer makes a reasonable, good faith effort to include the contract as part of the employer’s plan that satisfies § 1.403(b)–3(b)(3) of the 2007 regulations."

Thanks, Everett.

Follow up questions: Most employers that I'm dealing with re 403b plans that do not want to allow new dollars to go into the contracts after 12/31/2008 are opting to freeze (so as not to force annuity surrender or transfer fees and repayment/taxation of loan balances) rather than explore the possibility of terminating.

For an eligible employer that has allowed numerous vendors in the past, do you think that the employer cannot terminate the 403b plan (after, say, adopting a new, regulation-compliant plan document) because of the inability to force the multiple vendors to pay out within a certain time frame of adopting the termination amendment?

My take on Treas Reg 1.403(b)-10(a)(1) that requires distribution "as soon as administratively practicable after termination" to allow for payouts when the individual 403b contract between the employee and vendor permits in light of plan termination. The employer is not a party to that contract and thus not able legally to require payout contrary to the terms of the contract.

Alternatively, since the regulations speak about the need to be maintained per a 403b plan as a requirement on the contract but section 8.01 of Rev Proc 2007-71 says such is deemed to be satisfied if the employer made a good faith, reasonable effort with the vendor (e.g., asking the vendor for info and giving the name and contact info for the person at the employer responsible for 403b issues), do you think that for termination purposes after the employer makes a good faith effort the only contracts that must be distributed as soon as reasonably practicable are those as to which the vendor (likely with the consent of the employee) agreed to subjugate the contract to the terms of the 403b plan adopted by the employer?

Or, could the employer bifurcate its 403b program into two, one for contracts so subjugated and the second for other contracts--and then just terminate the first such 403b plan?

I don't understand 403(b) plan terminations, but following are my answers (which reveal that terminations are not all I don't understand).

"For an eligible employer that has allowed numerous vendors in the past, do you think that the employer cannot terminate the 403b plan (after, say, adopting a new, regulation-compliant plan document) because of the inability to force the multiple vendors to pay out within a certain time frame of adopting the termination amendment?

"My take on Treas Reg 1.403(b)-10(a)(1) that requires distribution 'as soon as administratively practicable after termination' to allow for payouts when the individual 403b contract between the employee and vendor permits in light of plan termination. The employer is not a party to that contract and thus not able legally to require payout contrary to the terms of the contract."

My understanding is that there must be an actual distribution of assets, which can be in the form of an individual contract similar to a qualified plan distributed annuity contract, and that all the distributions must be done without too much delay. The summary of Bob Architect's statements on page 1750 of the 7/29/08 BNA Pension & Benefits Reporter seems to report him as saying you don't have a termination if one plan participant in a custodial account refuses to instruct the custodian to distribute, and so rollovers in connection with the attempted termination by 99 other plan participants in a group annuity contract would be taxable.

"Alternatively, since the regulations speak about the need to be maintained per a 403b plan as a requirement on the contract but section 8.01 of Rev Proc 2007-71 says such is deemed to be satisfied if the employer made a good faith, reasonable effort with the vendor (e.g., asking the vendor for info and giving the name and contact info for the person at the employer responsible for 403b issues), do you think that for termination purposes after the employer makes a good faith effort the only contracts that must be distributed as soon as reasonably practicable are those as to which the vendor (likely with the consent of the employee) agreed to subjugate the contract to the terms of the 403b plan adopted by the employer?"

I think that the employer, not the vendor, decides which contracts are part of the employer's 403(b) plan. To me section 8.01 of RP 2007-71 is not clear about whether a contract for which the employer satisfies section 8.01 is therefore necessarily part of the employer's plan. If it is, then termination of the plan would require distribution of the assets of those contracts. I think the more likely reading of section 8.01 is that an employer can satisfy section 8.01 for a contract and also exclude the contract from the employer's 403(b) plan.

"Or, could the employer bifurcate its 403b program into two, one for contracts so subjugated and the second for other contracts--and then just terminate the first such 403b plan?"

I don't know what to make of the following from 72 Federal Register at 41130:

"In the case of a plan that is funded through multiple issuers, it is expected that an employer would adopt a single plan document to coordinate administration among the issuers, rather than having a separate document for each issuer."

Being conservative, I would not terminate unless I were confident that all contracts and accounts to which the employer contributed after 2004 would be fully distributed soon after the termination date.

Thank you, again, Everett.


Did BNA report any rationale proferred by Mr Architect for the regs setting forth a manner by which an ER could effect distribution of a 403b annuity contract (i.e., delivering it) incident to plan termination, but should not be able to notify the vendor of a 403b mutual fund-only account that the employer is terminating and "washing its hands" of that account, in order to effect the necessary distributions incident to plan termination? The reason for different regulatory treatment of the two types of 403b products does not seem obvious to me.

Following is what I have on this:

1. The following comment from the last page of the article at http://www.bakerdstreamingvid.com/blogdocs..._Annuities.pdf:

"An unusual twist for the 403(b) QPDA is the existence of 403(b) custodial accounts. The new 403(b) regs seem to contemplate that a custodial account (which is deemed to be an annuity contract under the 403(b) rules) could serve as a QPDA, something which is not possible under the current 401(a) guidance. It will be interesting to see how the IRS resolves this particular issue."

2. The following SunGard comment at http://www.relius.net/News/TechnicalUpdates.aspx?ID=407:

"The regulations will treat a plan’s distribution of a fully paid individual insurance annuity contract (or custodial account) as a distribution."

3. The following from Plan Sponsor's 6/3/08 (b)lines Ask the Expert:

"Note, too, that there are a couple of other issues involving distributions upon termination that the regulations do not address, such as whether a certificate under a group contract is treated the same as an individual contract for such distribution purposes (though IRS personnel have informally indicated so), and whether custodial accounts should be treated like annuities for this purpose (where the answer is less clear). More IRS guidance is needed in this area."

4. The following from page 1750 of the 7/29/08 BNA Pension & Benefits Reporter on Bob Architect's statements:

"[O]ne participant is in a custodial account and does not want to instruct the custodian to distribute the assets, then there would not be termination under the tax code."

Can some one explain how a participant can prevent distribution of his account. Custodial accounts in 403b plans that I have seen are held under an agreement between the custodian and the employer in which the employee has a vested interest in his account balance. If the employer terminates the agreement (as it is permited to do) the custodian will notify the participant that the funds have to be moved to another 403b account or rolled over to an IRA within a certain number of days. If the participant does not comply the custodian is permitted to distribute the funds or purchase an annuity. How is participant consent required????

Or is this discussion limited to custodial accounts that were transferred under 90-24 to a brokerage which was not a custodian under the 403b plan in which case the custodial agreement is between the employee and the custodian?

My guess is that Bob Architect's reference was to an individual custodial account. Many public employers have contributed to individual custodial accounts.

A third thank you is in order, Everett.

The snippets you quote do seem consistent with paragraph 15 of the piece that attorney Kristi Cook wrote for Horace Mann on the final 403b regs (https://www.horacemann.com/products/annuity/final-403b-analysis.pdf). I'm still trying to figure out the reason for the different treatment in this respect of annuity contracts and mutual fund-only accounts under 403b plans in the throes of termination.

Everett,

Suppose that an ER adopts a written 403b plan (regulation compliant) that specifies that only those 403b products subject to distribution upon termination of the 403b plan by the ER are maintained pursuant to the 403b plan. The ER then contacts all 403b vendors to which the ER has sent any contributions since 1/1/2005, asks for info about those contracts, gives the name and contact info of the person at ER for 403b issues, sends a copy of the adopted 403b plan (and proposed info sharing agreement that specifies among other things that the vendor agrees that the 403b product is subject to the ER's 403b plan), and asks the vendor to sign such info sharing agreement. The ER has made, in my opinion in reading section 8.01 of Rev Proc 2007-71, a good faith, reasonable effort to include the 403b products of such vendors.

If a vendor refuses, section 8.01 of Rev Proc 2007-71 indicates that the requirement that the contract be maintained pursuant to a 403b plan document of an eligible employer is deemed satisfied so long as the employer made the good faith reasonable effort.

The only 403b products maintained pursuant to the ER's 403b plan document are those as to which the vendor signed the info sharing agreement. By the vendor signing such agreement, the ER now has contractual authority to terminate the plan and instruct the distribution of all those 403b products maintained pursuant to the 403b plan.

The real question for this workable solution to the termination dilemma where there are mutual fund-only accounts as some of the 403b products part of the ER's 403b program since 2004 is whether the ER's requiring for inclusion in the ER's 403b plan that the vendor agree (in the info sharing agreement) that the 403b products of the vendors will be subject to the 403b plan of the ER (including distribution on plan termination) defeats the notion that the ER has made a good faith, reasonable effort to include those 403b products.

My argument is that ER's insisting upon such does not defeat the otherwise good faith, reasonable effort for inclusion of those 403b products because requiring such is necessary to enable the ER, as a practical matter, to someday terminate the 403b plan.

After reading her comments in paragraph 15 I dont think Kristy Cook has ever read a 403b custodial agreement because they all have opt out clauses which allow the custodian or employer to terminate the agreement and/or distribute the accounts after notifying the participant without the need to obtain the participant's consent to the distribution. The reason for such clauses is to provide either party with an out in the event of malfeasance (the employer wants to terminate the agreement immediately after fraud by the custodian is discovered) or to prevent economic harm, e.g., custodian wants to terminate the agreement because the employer stops paying fees to the custodian to adminster the plan.

In my opinon I would ignore anything by persons who are not aware of the agreements in the custodial fund markets.

Hi, mjb,

I have seen 403b custodial agreements that do not give the employer the rights that you mention being in those 403b custodial agreements that you have reviewed. For example, see State Street Bank and Trust Company's 403b Custodial Agreement. Nowhere is the employer so empowered over the agreement or account, and section 10.1 gives the custodian alone the right to make amendments to the agreement. The employer is not even a signatory to that agreement, just the employee and State Street are. These contracts are making it difficult to terminate a 403b plan.

Do you happen to have any comments about the word-around described in post #10?

The state street custodial agreement may be a 90-24 type of agreement between the employee and the custodian for accounts held at a brokerage instead of under agreement between the employer and custodian that would exist if the employer sponsored a plan. (See 1.1, 2.1). A separate account application is signed by the employee (2.2). Also Section 6.5 permits the custodian to resign after giving the employee 30 days notice which confirms my point that custodian always has the right to resign without the consent of the other party to the contract.

There exists the possibliity that there is a separate agreement between the custodian and the employer.

It could be an old 90-24 agreement, but it does have provisions about salary reduction (i.e., new money). These types of agreements are not uncommon in the context of what many employers have been doing and now need to make effort to bring into compliance with the new regs--and many such employers are hoping to be able after adopting a plan document to terminate.

Do you have any comments/concerns about the work-around mentioned in post #10?