Plan sponsors wanting to terminate their 403(b) plans have struggled with a lack of clear guidance on certain key issues since 2007 when IRS regulations specifically authorized 403(b) plan terminations. Some of the termination requirements set out in those regulations – especially those related to distribution of plan assets – have raised difficult questions for some 403(b) plans. A recent revenue ruling from the IRS answers some of these questions.

To terminate a 403(b) plan, the sponsoring employer must satisfy certain basic requirements. The employer must adopt a terminating resolution, amend the plan to provide for its termination, and notify participants. Participants in the plan must be fully vested, and the plan must distribute all assets within a reasonable time following the termination date. An employer that terminates a 403(b) plan generally must refrain from making contributions to any 403(b) arrangements for a specified time period after the termination.