Impact of Final 403(b) Regulations on "90-24"Transfers
The Treasury department, via the Internal Revenue Service, published new 403(b) regulations on July 26, 2007, consolidating over 40 years of regulatory guidance. The majority of the new rules are effective beginning January 1, 2009, providing California State University (CSU) time to incorporate key changes into our Tax Sheltered Annuity (TSA) program. However, CSU needed to make one key decision regarding 90-24 transfers and communicate our decision to both our TSA vendors and to over 10,000 CSU TSA participants.
Revenue Ruling 90-24 allowed 403(b) participants to make in-service transfers to another
403(b) vendor (called an in-plan transfer) without incurring a taxable event, provided that distribution restrictions under the new contract were no more liberal than those under the old contract.
Under the new regulations, if a transfer is made after September 24, 2007, the transfer could be deemed a taxable event adversely impacting the participant. The transfer is at risk because the new regulations require CSU to have agreements in place with all of its TSA vendors and they, in turn, have to agree to share information with other vendors. CSU has 98 TSA vendors in its program and since this requirement is new, no information sharing agreements exist.
To give CSU time to implement these changes, it took the following actions:
- Suspended 90-24 transfers as of September 25, 2007, to provide CSU time to study the available options under the new rules.
- Notified all TSA companies in the CSU’s TSA program of its decision to suspend 90-24 transfers for all CSU TSA participants.
- Notified all CSU TSA participants by letter from the Chancellor’s Office of CSU’s decision to suspend 90-24 transfers until further notice. Benefit Officers received an advance copy of the letter to TSA Participants.
TSA Participants will continue to be able to:
- Continue making deductions to their current CSU-authorized TSA vendor. Employees may increase or decrease their current deduction amount.
- Stop contributions with their current TSA vendor and enroll with a different TSA vendor on CSU’s list of approved TSA vendors.
- Make an in-service transfer no later than September 24, 2007, which will be “grandfathered” under the rules of Revenue Ruling 90-24. They will be considered “qualifying” transfers and will not trigger immediate taxation of the transferred funds. These grandfathered contracts, however, if transferred again after September 24, 2007, will be subject to the new rules.
- Request a cash distribution or a rollover after September 24, 2007, if the TSA participant has a distributable event (e.g., age 59-1/2 or termination of CSU employment).
- Purchase CalPERS service credit with 403(b) funds through the normal process.
- Continue taking advantage of all features (e.g., loans) in an individual 403(b) plan except for the 90-24 transfer.