Friday, August 5, 2011

Exempt Magazine Preview Part 2

Thought I would give our readers an excerpt from another one of the articles from the newest issue of NPT's Exempt Magazine.  This article is about 403(b) plans:

In Revenue Ruling 2011-7 issued earlier this year, the Internal Revenue Service (IRS) provided sponsors of 403(b) plans with some much-needed guidance regarding how to terminate plans. Many 403(b) plan sponsors have been reconsidering whether they want to continue to maintain such plans in light of the final regulations that were issued by the IRS in 2007 covering 403(b) plans.

Until this guidance was issued, the IRS’s position was, generally, that a 403(b) plan could not be terminated, so the guidance is a welcomed step. However, there are issues that have not been addressed by the IRS in the guidance and issues that plan sponsors may need to address to terminate their plans.

Steps to Plan Termination

The guidance outlines the steps a plan sponsor needs to take to effectively terminate a plan and to distribute plan assets. Below is a brief discussion of each of the steps and potential issues that a plan sponsor must consider.

Adopt a Binding Resolution to Terminate the Plan. On or before the date of termination, the plan sponsor must adopt a binding resolution establishing the termination date, freezing contributions to the plan, discontinuing the purchase of annuity contracts or mutual funds, fully vesting all plan participants, approving the distribution of plan benefits and approving the termination of the plan.

This would seem to be relatively simple, except that the IRS assumes that a plan’s document(s) allow the plan sponsor to terminate its plan. However, this is frequently not the case, so plan sponsors must review the plan document to be sure it allows for the termination. If the plan document does not contain termination provisions, then the plan sponsor should consult with a plan advisor to determine if the language authorizing the termination can be added to allow for it.

Be sure to read the full article over at The NonProfit Times.

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