403(b) Outlook: Contract Exchanges/Plan-to-Plan Transfers
March 19, 2008
What is the rule? The final 403(b) regulations have made significant changes to the rules governing 403(b) annuity contracts and custodial accounts. Under the final regulations, plan sponsors will be required to designate the vendors that are approved to receive contributions under their written plan. These approved vendors are also referred to as the "payroll slot vendors". Those vendors not approved under the plan to receive contributions are referred to as "unapproved" or "non-payroll slot" vendors. Under the final 403(b) regulations, a 403(b) annuity contract or custodial account can be exchanged for another 403(b) contract or custodial account under the same plan ("intra-plan contract exchanges") or directly transferred to a contract or account under another 403(b) plan ("plan-to-plan transfers") but only if it is in accordance with the requirements noted below. (Treasury Regulation Section 1.403(b)-10(b))
Effective September 25, 2007, Intra-plan Contract Exchanges are allowed to:
- Unapproved (non-payroll slot) funding vehicles. If the unapproved (non-payroll slot) vendor and employer have agreed to enter into an information sharing agreement ("ISA") by January 1, 2009. The information that must be shared under the ISA includes the information that is required for tax reporting and compliance purposes.
- Approved (payroll slot) vendors. An ISA is not required between the employer and an approved (payroll slot) vendor because the regulations presume the necessary information will be shared by virtue of the approved vendor’s relationship with the employer.
NOTE: As an ISA will only be required for unapproved vendors, this rule will not impact plans that limit transfers to approved (payroll slot) vendors only.
Plan-to-plan transfers are permitted for both current and former employees if:
- Both the transferring and receiving plans permit transfers.
- The participant or beneficiary’s accumulated benefit immediately after the transfer at least equals the accumulated benefit immediately before the transfer.
- Distribution restrictions after the transfer are at least as restrictive as immediately before the transfer.
Transfers to/from non-403(b) plans: The final regulations make it clear that neither a qualified plan nor an eligible governmental 457(b) plan may transfer assets to a 403(b) plan, except by direct rollover. In addition, a 403(b) contract may not be exchanged for an annuity contract that is not a 403(b) contract.
What has changed? One of the major changes made by the final regulations is the repeal of Revenue Ruling 90-24 for transfers and contract exchanges made after September 24, 2007 Because the final regulations have repealed Revenue Ruling 90-24, contract exchanges to unapproved vendors that had been administered in accordance with IRS Revenue Ruling 90-24 will change. Under Revenue Ruling 90-24, direct transfers between 403(b) contracts and custodial accounts were permitted if the successor contract or custodial account included distribution restrictions that were the same as or more restrictive than the contract or account that was being exchanged. Under this ruling, the contract or account to which the transfer was made did not have to be authorized by the plan. However, the plan terms could have always restricted these transfers to approved vendors only.
The requirements on transfer under Revenue Ruling 90-24 have been replaced by the requirements noted above in "What is the rule?"
Effective date is for transfers after 9/24/07. For transfers to unapproved vendors after this date, an ISA must be in place by 1/1/09.
What happens if you fail to comply? After September 24, 2007, contracts issued by an unapproved vendor will generally not be a valid 403(b) contract unless there is an ISA in effect on January 1, 2009 which could cause the contract accumulation to be fully taxable. However, IRS guidance issued after the final regulations permits an employee to "re-exchange" the contract issued by the unapproved vendor with no ISA for a contract of an approved vendor if done by July 1, 2009.
Read more about the 403(b) regulations.
Next week’s issue: Information Sharing Agreement Requirements