A Road Map to 403(b) Transactions

Sue Diehl

Even though this is probably old news…and it really is…it is always good to review transactions, especially the definitions, since saying the wrong thing — or worse, filling out the wrong form — could prove disastrous for the plan participant. A list reviewing common transactions for 403(b) plans is below.

Plan-to-plan transfer: This is a transfer from one employer’s plan to a different employer’s plan. Plan-to-plan transfers may only be made to a plan where the participant is a current or former employee. There is no requirement that a distributable event occur. Both plans must allow for these types of transfers in the plan documents. Vendors do not report these transactions to the IRS on Form 1099-R, which, in turn, are not reported by the participant on their Form 1040. The vendor disbursing the monies must indicate what the assets consist of; otherwise, the monies go into a “restricted” source and the most restrictive distributable events will apply to these monies. This is, in most cases, the “Employer Contribution” account.

Exchange between approved vendors: This is a movement of monies from one provider to another under the same 403(b) plan. Depending on the plan either:

1. both vendors must be on the approved vendor list that is typically part of what is called the “Vendor Attachment” to the plan or
2. it is a movement of funds from a deselected vendor and an approved vendor.

The plan must permit exchanges between approved vendors. Exchanges are not reported to the IRS on Form 1099-R. The vendor disbursing the monies must indicate what the assets consist of; otherwise, the monies go into a “restricted” source and the most restrictive distributable events will apply to these monies.

Exchange from deselected vendor to approved vendor: This is a movement of money from a deselected vendor (one that holds assets but is no longer accepting ongoing contributions) to an approved vendor under the plan. The plan must permit such exchanges. Exchanges are not reported to the IRS on Form 1099-R. The vendor disbursing the monies must indicate what the assets consist of; otherwise, the monies go into a “restricted” source and the most restrictive distributable events will apply to these monies.

Exchange from a grandfathered orphan 403(b) account to an approved vendor: A grandfathered orphan account is one that did not accept contributions after Dec. 31, 2004. At present, until the IRS provides more guidance such accounts may not be moved to another 403(b) — only to an IRA when a distributable event occurs. These contracts are not a part of the employer’s plan. Each vendor must do their own due diligence in proving a distribution; i.e., verify age for age 59½, verify separation from service, loan amounts, hardship etc.

Exchange from an orphan 403(b) account (non-grandfathered) to an approved vendor: An orphan account is one that is presently not associated with the employer’s plan. For example, it could have been a valid 90-24 transfer made before Sept. 24, 2007. The vendor disbursing the monies must indicate what the assets consist of; otherwise, the monies go into a “restricted” source and the most restrictive distributable events will apply to these monies. If a transfer occurred after Sept. 24, 2007, the monies should have been transferred to an approved vendor or corrected by July 1, 2009 and re-transferred to an approved vendor under the employer’s plan. There has been no guidance issued after the July 1, 2009 date was communicated by the IRS. NTSA has requested that correction methods be added to EPCRS for this potential failure.

Rollovers from the 403(b): A distributable event must occur (the participant must be separated from service, attained 59½, qualify for hardship or disability payments, etc.). All rollovers are reported on Form 1099-R, and the participant must report these amounts on their Form 1040. If a rollover is not made (there are exceptions), 20% mandatory withholding is applied to the taxable portion of the distribution. Rollovers may only be made from a 403(b) to a traditional IRA, to a Roth IRA (“qualified rollover contributions,” if eligible), or to another employer plan that accepts rollovers where the participant is a current employee.

Tax ramifications if above is not met: If the above rules are not met or the incorrect transaction is used, the plan is in jeopardy of being taxed to all participants. Proof of due diligence is required. Emails showing receipt, documented phone logs or written correspondence are acceptable.

Susan D. Diehl, CPC, QPA, ERPA, is President, PenServ Plan Services, Inc. and Chair of the NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.