403(b) Transfer and Exchange Rules
New Rules Are Effective September 24, 2007
Employee Benefits Alert — Higher Education Services, Fall 2007

The final 403(b) regulations have established new rules for 403(b) investment contract exchanges effective September 24, 2007. Not complying with these rules could result in employees’ contracts not qualifying as tax-deferred 403(b) contracts. There are a few different approaches that employers can take to provide interim compliance with the new rules until final plan design and administrative procedures are put into place during 2008.

Exchanges

Traditionally, participants may have moved funds from one provider to another, through annuity or contract exchanges. Currently, unless employer or plan rules to the contrary are in place, these exchanges may occur if the rules under IRS Revenue Ruling 90-24 are complied with.

Effective after September 24, 2007 the new 403(b) rules require contract exchanges to be pursuant to an information-sharing agreement between the employer sponsor and the new provider in order to help ensure that there is enough information obtained by the parties to allow for compliance with the new rules. In addition, the rules require that:

• The plan provides for such an exchange
• The participant or beneficiary have an accumulated benefit immediately after the exchange that is at least equal to the accumulated benefit of that participant or beneficiary immediately before the exchange
• The new provider’s contract includes distribution restrictions that are not less stringent than those imposed on the contract being exchanged

The regulations also address plan transfers. A transfer is an in-service exchange of contracts with a 403(b) plan sponsored by another employer, generally limited to a current or former employer of the participant. Transfers are not subject to the September 24, 2007 deadline, but unless the transferor and transferee plans both allow for transfers, moving funds to a new contract may be classified as an exchange, subject to all of the above rules and limitations.