Distributing 403(b) Annuities, Part II:

The 403(b) Plan Distributed Annuity

Written by: Bob Toth

As we had noted in a previous blog on this issue, the new 403(b) regulations permit the distribution of a "fully paid individual insurance annuity contract," as a distribution option upon the termination of a 403(b) plan.  We envision this as a particularly useful option in plans which are funded with individually owned annuity contracts, contracts over which the employer has little-if any- control. It gives the employer the ability to relinquish all of its obligations related to these pesky sorts of arrangements without having to actually force the distribution of funds from its terminating 403(b) plan. The regulations are silent, however, on just how these "fully paid individual insurance annuity contracts" should be treated in the absence of an employer. We had also noted in our blog that there is a useful analogy in the 401(a) world, that being the "qualified plan distributed annuity."

Bob Architect, one of the principal drafters of the 403(b) regulations at the Service, addressed the issue on a 403(b) panel I moderated (which also featured Cheryl Press) last Thursday at the IRS/ASPPA Great Lakes Benefits Conference in Chicago. Bob mentioned that the model for treating these contracts should be, indeed, the qualified plan distributed annuity.

This is a very helpful suggestion, as it now gives us a framework within which to start the conversation of what needs to be done to make this new creature work.  Under these sorts of annuities (do we dare give them an acronym, the "QPDA"?), the insurance company steps into the role of the plan administrator, and other qualified funds from other plans and IRAs amounts can technically be rolled into and out of them like IRAs.

They are NOT, however, IRAs, which means that loans can still be taken from them, and IRA reporting need not be done. Nor, for that matter, do Form 5500s need to be done.

So now there are a host of questions that can be really focused upon, as the 403(b) QPDA actually has no existence in either the statute or regulations. One of the key questions unique to the 403(b) world involves the individual 403(b) custodial account: is it to be treated as a QPDA, even though it is not an annuity contract?

This may be the opportunity to address the unanswered questions for the 401(a) QPDA, as well as the 403(b) QPDA, as there remain many of them. The 403(b) issues, however, are pressing because of their immediacy.