Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.
The final 403(b) regulations created a timeline for the transition from “transfers” to “exchanges” along with requirements applicable to each phase of the transition. The following is a summary of this transition guidance.
“Transfers” Completed on or Before Sept. 24, 2007. Transfers taking place under Rev. Rul. 90-24 that were completed on or before September 24, 2007 are considered to be “grandfathered” 403(b) accounts. “Grandfathered” simply means that those accounts can continue to exist “outside” of an employer’s 403(b) plan document. The employer has no responsibility for grandfathered 403(b) accounts, and compliance for such accounts rests with the vendor and participant. After Sept. 24, 2007, it is no longer permissible to exchange any 403(b) account value to any 403(b) account held by a vendor that is not included under the employer’s 403(b) plan. (See later sections for the impact of information sharing agreements.)
Transfers and Exchanges during the “Interim Period” of Sept. 25, 2007 – Dec. 31, 2008. New requirements for transfers and exchanges were imposed by the final 403(b) regulations for transactions occurring after Sept. 24, 2007. After that date, transfers and exchanges must satisfy new requirements. A plan-to-plan transfer is permitted if the plan document(s) of both the sending plan and the receiving plan permit plan-to-plan transfers. Exchanges in the interim period are permitted only if the conditions set forth in IRS Treas. Reg. §1.403(b)-10(b) (included in its entirety at the end of this chapter) are met.
Under the regulations, an exchange may only be made if, in addition to the general requirements described hereafter, the vendor accepting the exchange enters into an agreement to share information with the employer as needed for compliance purposes and the employer’s plan (when adopted) permits exchanges. Both of these requirements had to be accomplished by the effective date of the regulations. Subsequent IRS guidance, Rev. Proc. 2007-71 liberalized the rules for exchanges to also permit exchanges where the receiving vendor was “included” in the employer’s 403(b) plan.
If the employer did not yet have a plan document (since it was not required until Dec. 31, 2009), the employer’s 403(b) plan was deemed to “include” all vendors
that accepted 403(b) contributions from the employer, that is - vendors that had a 403(b) payroll relationship with the employer on and after Jan. 1, 2009. Thus,
during the transition period, an exchange can only occur if the receiving vendor either is included under the employer’s 403(b) plan (had a payroll slot) or executed an information sharing agreement with the employer sponsoring the 403(b) in which the individual was a participant.
If one of those conditions is not met, the regulations provide that an improper exchange has taken place.
Correction of an improper exchange on or before June 30, 2009. Rev. Proc. 2007-71 provided that an improperly exchanged account could be corrected through a re-exchange to a 403(b) account held with a provider that is a part of the employer’s plan provided the re-exchange takes place on or before June 30, 2009. Of course, the employer’s 403(b) plan must permit exchanges as a feature in the plan document. Failure to comply would result in the improperly exchanged account becoming a taxable event.