It had to happen if we kept at this long enough. We have written often over the past few years on the minutiae of 403(b), particularly where they demonstrate the often goofy differences between 401(k) plans and 403(b) plans. We have also written some on the finer technical rules which apply to plan distributed annuities, which tend to apply in some pretty unusual ways.
Now there is the rare opportunity to discuss the "crossing" of these two worlds, hopefully without the cataclysmic effect of the crossing of the "proton ray gun" beams in the original Ghostbusters movie. These two areas find a common theme in the handling of mandatory cash outs to terminated employees, of all things.
I make light of this point, but minutiae like this is not without important effect: the "form and operation" plan document rules require us to get it right, or risk serious tax consequences.
It goes something like this: Code Section 401(a)(31) contains the direct rollover rules and applies to both 401(a) and 403(b) plans. Oddly enough, this section also contains the mandatory cash out rules which applies to account balances of less than $5,000 (I say "oddly" because 411(a)(11) actually has the old rule, which still exists, which permits the distribution without consent of amounts less than $5,000 from a tax qualified plan) for terminated participants.
Now suppose you have a 403(b) plan funded with individual annuity contracts, and you diligently drafted 401(a)(31) language containing a mandatory cash-out clause. This rule, buy the way, requires cash-outs to be made for all participants, and into an IRA, if the plan chooses to have cash outs..
It appears to me as if you may have a problem on your hands. If the Plan Administrator cannot access those funds in the individual annuity contract, how is it to "mandatorily" cash out sums less than $5,000 and roll it into an IRA when it has no control over those assets? Sounds like a serious "form and operation" challenge.
The real answer probably lies in the oft-overlooked section 401(a)(31)(C), which only requires a mandatory rollover if the force-out would otherwise be subject to immediate taxation. Forcing a 403(b) annuity contract out of a plan as an in-kind distribution does not appear to have to comply with 401(a)(31), because that force out would not be a taxable event. This means you can turn to ERISA Section 203(e) (Code Section 411(a)11 does not apply to 403(b) plans) which permits the distribution, without consent, of the vested "present value of the nonforfeitable benefit. " It does not require an IRA, or a rollover, or even a cash distribution. The in-kind annuity account distribution seems to work.
A handy tool, by the way, to help manage the Form 5500 "100 participant" rule for audit purposes.
This is where those "beams cross" into the Plan Distributed Annuity (PDA) world. A 401(a) plan could, instead of following the 401(a)(31) rules, merely purchase a PDA in the name of the participant without that being a taxable distribution, either. Code Section 411(a)11 DOES apply here (as well as ERISA Section 203(e), in most cases. It uses the term "nonforfeitable accrued benefit," not cash lump sum). Perhaps a handy tool clean out certain kinds of plans.
By the way, this further demonstrates the caution one should use: ERISA 203(e) will not apply to governmental and church 403(b)plans-which raises the possibility of forcing out larger amounts. You do not save on the Form 5500 and audit fees (there are none), but it offers some interesting planning opportunities.
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