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CCH® PENSION — 03/04/11

Termination Of 403(b) Plan Causes Contributions To Other 403(b) Plans To Cease For 12 Months

from Spencer’s Benefits Reports: Termination of an IRC Sec. 403(b) plan and the subsequent distribution of assets must follow the rules specified in Reg. Sec. 1.403(b)-10(a), clarified the Internal Revenue Service in Rev. Rul. 2011-7.

The 403(b) plan described in the ruling was a governmental plan, not subject to ERISA. The plan was funded through fully-paid individual annuity contracts, group annuity contracts, and custodial accounts that are treated as annuity contracts held by one or more regulated investment contracts. All of the funding came from nonelective employer contributions and participant elective deferrals.

In the ruling, the IRS approved the termination of the 403(b) plan as of Jan. 1, 2012, because it met the following criteria, as set forth in the regulations:

• Contributions will not be made to another 403(b) plan for a 12-month period following the Jan. 1, 2012, termination date. This requirement applies to the sponsoring employer and to “any other entity that is treated as the same employer under IRC Secs. 414(b), (c), (m), or (o).”
• A binding resolution was signed on or before Jan. 1, 2012, that the employer would cease future annuity contract purchases.
• The binding resolution provided that all benefits held by the plan are fully vested and nonforfeitable as of Jan. 1, 2012.
• All benefits must be distributed as soon as practicable in the form of fully paid individual insurance annuities, individual certificates issued from the group annuity contract, or a liquidating distribution from the group annuity contract or the custodial accounts. The liquidating distributions may be rolled over to an individual retirement account or an eligible retirement plan.

Not Includible In Income

The IRS points out that “the delivery of a fully paid individual annuity contract to participants or beneficiaries, or of an individual certificate evidencing fully paid benefits under a group annuity contract, is not included in gross income until amounts are actually paid to the participant or beneficiary out of the contract, so long as the contract maintains its status as a Sec. 403(b) contract.” However, the distribution of any amount other than an annuity contract, such as a single-sum payment, is includible in the gross income of the recipient unless the amount is rolled over to an IRA or eligible retirement plan.

Rev. Rul. 2011-7 also addresses the termination of a money purchase pension plan that is subject to ERISA. In this instance, the distributions must adhere to ERISA Sec. 205, relating to qualified joint and survivor annuities and qualified preretirement survivor annuities. In addition, the plan must file a final Form 5500 return/report. As with the 403(b) plan, the taxation of an individual annuity contract will begin when the amounts are actually out. The taxation of any other payments will begin upon receipt by the participant unless the amount is rolled over.

The principal authors of Rev. Rul. 2011-7 are Kathleen Herrmann and Sherri Edelman, Employee Plans, Tax exempt and Government Entities Division. They can be reached by email at RetirementPlanQuestion@irs.gov.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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