Prior to the issuance of the final regulations for Internal Revenue Code Section 403(b) plans in 2007, there had been a question whether it was possible to terminate a 403(b) plan such that the sponsoring employer had no further administrative or other filing obligations. With the publication of the final 403(b) regulations, the IRS clarified that a 403(b) plan may be terminated. However, the provisions set out in the final regulations left many questions open, and many practitioners questioned whether it would not be possible to comply with the requirements set out in the regulations in order that it may be positively determined that the 403(b) plan had been terminated. In response to these concerns, the IRS recently issued Rev. Rul. 2011-7 providing additional guidance on the requirements for a plan sponsor to terminate a 403(b) plan. The revenue ruling described several fact patterns and describes whether the actions taken result in termination of the 403(b) plan and describe the tax consequences to the participant of such actions. Under the revenue ruling the IRS has indicated that the following requirements must be met to terminate a 403(b) plan:

  • The termination of the 403(b) plan must be approved by formal action of the governing body of the sponsor.
  • The termination must satisfy all applicable laws including the final 403(b) regulations, must provide for 100 percent vesting, and must satisfy any other requirements imposed by the funding vehicles used in the 403(b) plan.
  • Plan assets must be distributed as soon as possible following plan termination.
  • If plan participants are allowed to roll over the benefits to another plan or qualified retirement vehicle, they must be provided with appropriate notice of their rights.
  • Neither the plan sponsor nor any control group member may make contributions within 12 months of the termination of the 403(b) plan to another 403(b) plan which covers more than 2 percent of the employees under the terminating plan.

Under the revenue ruling while additional guidance is provided, many issues will remain with respect to distributing plan assets, especially given the various provisions contained in multiple 403(b) funding vehicles. Thus, while this revenue ruling provides additional guidance, many practical problems will remain in terminating a 403(b) plan. For plan sponsors looking to terminate a plan, this revenue ruling must be reviewed carefully.