Terminating a 403(b) Plan: What You Need to Know

 

📖 Index

1. Introduction

2. What Is a 403(b) Plan?

3. Why Might a Plan Be Terminated?

4. Steps to Terminate a 403(b) Plan

5. Types of Distributions on Termination

6. Examples

7. Statistics & Trends

8. Practical Tips for Participants

9. Benefits & Challenges

10. Conclusion

11. FAQs

12. Call to Action

1. Introduction

Terminating a 403(b) retirement plan can seem intimidating—but with clear steps and sound guidance, it doesn’t have to be. Whether you're a nonprofit organization, public school, or a healthcare employer, understanding how to navigate the termination process is essential to ensure participants receive their funds smoothly and remain compliant with IRS regulations.

In this article, we'll break down the process into simple steps, outline what participants can expect, and provide real-world examples to bring the theory to life—all in Manika’s friendly, easy-to-understand style.

2. What Is a 403(b) Plan?

A 403(b) plan is a tax-advantaged retirement savings option available to employees of public schools, nonprofits, and certain ministers 

Contributions are often pre-tax (or Roth), grow tax-deferred, and may be invested in annuities or mutual funds

3. Why Might a Plan Be Terminated?

Organizations may decide to terminate a 403(b) plan for several reasons:

• Changing benefit strategies (e.g., switching to a 401(k) or IRA)

• Mergers, acquisitions, or sales

• Financial necessity or cost-saving

• Lack of participant interest or declining usage

The IRS requires that all accumulated benefits be distributed “as soon as administratively feasible” after termination

4. Steps to Terminate a 403(b) Plan

Here’s a detailed roadmap for terminating a plan:

Step	Action	Key Notes
1	Amend the plan	Add termination date, cease contributions, ensure full vesting
2	Notify participants	Provide clear communication and rollover guidance
3	Distribute assets	Within 12 months—via cash, in-kind, or rollover
4	File reports	File final Form 5500; optionally request determination letter (Form 5310)
5	Ensure complete compliance	Track rollover elections, missing participants, spousal rights

IRS Rev. Rulings 2011‑7 and 2020‑23 clarify that custodial accounts and annuities may be distributed in-kind without triggering immediate taxation 

5. Types of Distributions on Termination

• In-kind: Participants receive assets directly (e.g., mutual fund shares or an annuity certificate) 

• Cash: Immediate distribution, subject to taxes/penalties if under 59½.

• Rollovers: Transfer to IRA or another employer plan—tax-free when direct 

6. Examples

Example 1: Small Nonprofit with Group Custodial Account

A small nonprofit closes its 403(b) plan, distributing in-kind mutual fund shares along with documents evidencing each individual's new account. Assets retain 403(b) status post-termination 

Example 2: Public School Merging Plans

A school transitions from a 403(b) to a 401(k) plan. Staff are notified, assets rolled into the new plan, and final paperwork including Form 5500 is submitted—ensuring compliance and continuity.

7. Statistics & Trends

• As of 2019, 145,000+ defined-benefit plans underwent standard termination (via PBGC) —reflecting employers' evolving retirement strategies.

• IRS guidance 2020‑23 shows the growing importance of in-kind distributions, offering more flexibility for custodial account terminations

8. Practical Tips for Participants

1. Watch for communication—employers must share termination and rollover options.

2. Choose wisely: Rollover avoids taxes; cash may incur penalties if under age 59½.

3. Verify custodial documents with in-kind distributions to protect account status.

4. Seek professional help if confusion arises—especially for partial or early terminations.

5. Be proactive about rollovers—direct transfers bypass taxes and avoid delays.

9. Benefits & Challenges

Benefits

• Greater flexibility with in-kind distributions

• Smooth continuity with rollovers

• Full vesting protection

Challenges

• Consent required for some annuity distributions 

• Missing participants complicate termination; PBGC Missing Participants Program may help 

• Strict 12-month distribution timeline

10. Conclusion

Ending a 403(b) plan is significant but manageable with proper steps: amending the plan, clear communication, timely asset distribution, and regulatory filings. Understanding in-kind vs. cash vs. rollover options empowers participants to make the best decisions for their financial future.

11. FAQs

Q1. Can employees delay distribution?
A: No—assets must be distributed within 12 months of termination unless a successor plan exists 

Q2. What if participants don’t claim their distribution?
A: Employers should document efforts. Unresponsive cases may enter PBGC Missing Participants Program .

Q3. Are rollovers taxable?
A: If done via direct transfer, they are tax-free. Indirect rollovers require completion within 60 days or face taxes/penalty .

Q4. What happens to annuities?
A: Can be distributed in-kind; participant is taxed only when they take income later 

Q5. Does vesting change?
A: No—full vesting required at termination date; 403(b) plans are exempt from partial termination vesting rules 

12. Call to Action

If you’re terminating a 403(b) plan and need expert support, reach out to Manika Fintax Solutions. Let me assist you with compliance, filing, and smooth participant transitions—contact today for dedicated, professional help!

Manika keeps it friendly, clear, and efficient—ready to support your financial journey.