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IRS Guidance on Terminating 403(b) Plans

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Stephen I. Jurmu
Foster Swift Employment, Labor & Benefits Quarterly
Spring 2011

Many governmental and nongovernmental nonprofit employers maintain retirement plans that are described as "403(b) Plans." The legal compliance burdens associated with maintaining a 403(b) Plan have grown dramatically in recent years as the Internal Revenue Service (the "IRS") has increased its level of 403(b) Plan scrutiny. This growing compliance burden has prompted some 403(b) Plan sponsors to evaluate whether to terminate their 403(b) Plans. Initial IRS guidance left many questions unanswered concerning the steps that an employer must take to properly terminate a 403(b) Plan.

The IRS has recently published additional guidance (in the form of Revenue Ruling 2011-7) regarding the steps that an employer must take to properly terminate a 403(b) Plan. The guidance applies to both governmental 403(b) Plans (which are exempt from ERISA) and non-governmental nonprofit 403(b) Plans (which are subject to ERISA). It also discusses both 403(b)(1) Plans (which are funded with annuity contracts) and 403(b)(7) Plans (which are funded with mutual funds through custodial accounts). This new guidance will provide clearer guidelines for an employer that wants to consider terminating its 403(b) Plan now.

If you have any questions regarding these new rules, please contact Stephen Jurmu at 517.371.8260.