403(b) Plans and Nonforfeitability

Q. How does nonforfeitability apply to 403(b) plans? 

A. The IRS explains that under the concept of nonforfeitability: 

• Amounts under a 403(b) contract are nonforfeitable if they are fully vested under the 403(b) plan: “the employee for whom the contract is purchased has at all times a fully vested and nonforfeitable right (as defined in regulations under section 411) to all benefits provided under the contract.” In other words, employee contributions, rollovers and vested employer contributions all would be considered nonforfeitable and thus under the 403(b) contract. See Treas. Reg. Sections 1.403(b)-3(a)(2).
• Amounts not yet vested under a 403(b) plan technically are not considered to be under a 403(b) contract. That is, since such amounts are still forfeitable, they are considered tracked as 403(c) amounts (if held in a 403(b)(1) annuity contract) or 401(a) amounts (if held in a 403(b)(7) custodial account). See Treas. Reg. Section 1.403(b)-3(d)(2).

List of Required Modification (LRM) 65 (Vesting) of the 403(b) LRMs provides additional clarification regarding a 403(b) plan that has a graduated vesting schedule. “If only a portion of the Participant’s interest in a separate account becomes nonforfeitable in a year, then that portion of the contract will be considered a section 403(b) Annuity Contract and the remaining forfeitable portion will be considered a separate contract to which section 403(c) (or another applicable provision of the Internal Revenue Code) applies. Each contribution (and earning thereon) that is subject to a different vesting schedule must be maintained in a separate account for the Participant.”