(b)lines Ask the Experts – No Longer Tax-Exempt?

“Can this ineligible employer continue to maintain the 403(b) plan as a frozen plan? In other words, can the employer continue to sign legislative amendments and restatements as well as approve hardships, loans, and distributions as an ineligible employer?”  

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:  

Correct.  Treas. Reg. 1.403(b)-10(a) specifically allows for such a plan freeze, and the ONLY requirement of a newly ineligible employer, as you state, is that no new contributions be made to the 403(b) plan (Treas. Reg. 1.403(b)-10(a)(2)). It should be noted that these regulations apply to an employer who loses its status as a 403(b)-eligible employer; for plan sponsors who were never eligible to sponsor a 403(b) plan in the first place, but who did so anyway, this circumstance is an employer eligibility failure that must be corrected under EPCRS.   

Though the 403(b) regulations do not specify how long a 403(b) plan may be frozen, the plan sponsor may not wish to incur the administrative burden of maintaining both the frozen 403(b) plan and the new retirement plan that it will presumably sponsor for ongoing deferrals. Thus, the entity may wish to consider terminating the 403(b) plan. While the plan is frozen, the employer must continue to amend the plan to comply with current regulations, and must also ensure that the plan remains in operational compliance, which includes ensuring that loans and distributions are in compliance with the plan terms as well as the Code and ERISA.