On February 22, 2011, the Internal Revenue Service (IRS) provided guidance on terminating 403(b) plans. In Revenue Ruling 2011-7, the IRS stated that in order for a 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan. For this purpose, delivery of a fully paid individual life insurance annuity contract, or of an individual certificate evidencing fully paid benefits under a group annuity contract, is treated as a distribution. The distributed annuity contract will still be considered a 403(b) contract.
Revenue Ruling 2011-7 also addressed the requirement that, after plan termination, the employer makes no contributions to any other 403(b) plan. The IRS stated that contributions are made to another 403(b) plan only if contributions are made to a 403(b) contract during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during this period, fewer than 2% of the employees who were eligible under the terminated 403(b) plan as of the date of plan termination are eligible under another 403(b) plan, then that 403(b) plan is disregarded.