Following are some tips concerning distributions of benefits.
- Prepare and maintain distribution notices and elections.
- Provide distribution forms to participant, including the 402(f) notice for rollover information. The IRS provides language periodically for a 402(f) notice, also referred to as the Special Tax Notice. This notice describes the advantages of rolling over money to an IRA or another plan as well as the effect if a rollover is not completed by the terminated participant. The TPA should check periodically, especially when the law changes to see if the IRS has updated its sample notice.
- Review distribution forms to see if fully completed and signed by appropriate parties.
- Evaluate eligibility to receive a distribution.
- Authorize distributions and other transactions.
- Confirm vested interest on termination of employment.
- Determine amount to be distributed.
- If the plan permits Roth Deferrals, determine basis in Roth Distributions.
- If the plan permits Roth Deferrals, determine and maintain beginning date for Roth qualification period.
- If the plan permits Roth Deferrals, determine whether Roth distribution is qualified.
- Proper income tax withholding deposit made and IRS reporting on Form 945.
- Form 1099-R provided to participant and IRS.
- Determine cash-out amounts for the year (e.g., accounts for terminated participants with less than $1,000 value). Only available for group annuities or group custodial agreements.
- If elected under the plan, determine amounts to be moved to an automatic IRA rollover (e.g., amounts for terminated participants with $1,000 to $5,000 in value).
- If permitted under the plan, evaluate eligibility for hardship distribution.
- If permitted under the plan, notify of ceasing deferrals for six months, confirm that deferrals have ceased, solicit new deferral form after six months. Commentary: Consider the elements of the hardship withdrawal requirements after Jan. 1, 2019, keeping in mind that the new ability to take those withdrawals from earnings as well as actual deferrals, and from employer contributions would violate the terms of Internal Revenue Code 403(b) itself which limits hardship withdrawals to elective deferrals only. While it is permissible to eliminate the cessation of deferrals for six months, an amendment to the plan would be required. It is probable that plan amendments may not be made available until IRS guidance (expected by February 2019) has been posted and evaluated.
- Evaluate proposed QDRO to determine if it qualifies as such.
- Communicate to participant/former spouse regarding QDRO receipt (and provide copy of QDRO Policy) and QDRO determination.
- Segregate account and initiate distribution to alternate payee.
- Authorize and verify requirements for exchanges, 403(b) transfers and transfers to state DB plan Remember that plan-to-plan transfers are a movement from one 403(b) plan directly to another where the participant is a current or former participant of the plan that the monies are moving into. When the transfer money come into the accepting plan remember that there must be an accounting of what monies the transfer represents since those dollars will be moved in the same “buckets” on the new recordkeeping system. For example, deferrals would be moved into the deferral bucket; rollovers would be moved to the rollover bucket, etc.
Editor’s Note: This is an occasional feature in the NTSA Advisor. This tip is taken from the 403(b) Plan Sponsor Guide, which is being made available to school districts nationally to assist them in understanding how to improve 403(b) plan participation and savings rates to help employees achieve a comfortable and timely retirement.
The 403(b) Plan Sponsor Guide is part of the content contained in the NTSA Certified Retirement Education Specialist (CRES) materials. The NTSA Certified Retirement Education Specialist (CRES) program and designation has been developed in order to equip advisors to be qualified and available to teach the NTSA educational program, which is designed to provide teachers with the basics of planning for retirement and improve their retirement readiness. More information about CRES is available here.
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