IRS RESCUES ORPHANS AND RUNAWAYS: TRANSITIONAL RELIEF GRANTED TO TDA CONTRACT EXCHANGES

(Rev. Proc. 2007-71)

On November 27, 2007, the Internal Revenue Service released Revenue Procedure 2007-71, providing additional guidance in conjunction with the Final Section 403(b) Regulations issued in July 2007. The RevenueProcedure became effective on the date of its publication, December 17, 2007.

The Revenue Procedure provides transitional relief for TDA contracts and custodial accounts that were issued or exchanged before January 1, 2009. This relief is available to comply with the Final Regulations’ requirement that all 403(b) contracts and custodial arrangements be part of a written plan and be subject to an information sharing arrangement (ISA).

Current employees with orphan accounts/contracts issued before 2005 by issuers that have been “deselected” from the written plan (i.e. no contributions since 2004) are grandfathered. The employer need not seek information or provide information and does not need to include such contracts in its written plan.

For current employees with orphan accounts/contracts issued between 2005 and 2009 (i.e. between 01/01/05 and 12/31/08) by an issuer who is not receiving contributions (flow), the employer must make a reasonable good faith effort (RGF) to collect available information regarding issuers and to provide contact information to the issuer for the sharing of informationor the issuer must contact the employer and confirm information before granting a distribution or a loan.

For former employees and beneficiaries with orphan accounts/contracts issued before 2009, no action is necessary unless a loan is requested. If a loan request is made, the issuer must verify the existence of other loans and the amount of any outstanding loans before granting the request. The issuer can’t accept the participant’s “self-certification” of this information, although it may rely on the participant’s representation of “former employee” status.

If an “improper” contract exchange was made between 09/25/07 and 01/01/09, then a participant can correct it by re-exchanging for a new contract issued by a vendor included as part of the employer’s written plan, or for a new contract issued by a vendor that has entered into an ISA. This re-exchange must be completed by 07/01/09. No ISA is required for the previously “improperly” exchanged contract.

The written plan may also provide for “exchange only issuers”, so as to permit exchanges to issuers other than those included in the plan, if the issuer receiving the exchange and the employer execute an ISA. Some issuers/vendors may choose not to share private individual financial account information. In that case, a re-exchange must take place by the deadline, or the improper contract exchange will result in taxable consequences to the participant.

For more detail, please see the attached chart.