Under the final 403(b) regulations, a non-taxable exchange or transfer is permitted for a 403(b) contract if it:

(1)is a mere change of investment within the same plan, that is, a contract exchange;

(2)constitutes a plan-to-plan transfer, so that there is another employer plan receiving the exchange (see Q 4009); or

(3)it is a transfer to purchase permissive service credit (Q 4011).¹

Contract Exchanges within the Same Plan

Under prior law, Revenue Ruling 90-24 provided that a direct transfer between issuers of an amount representing allor part of an individual’s interest in an IRC Section 403(b) annuity or custodial account was not a distribution subject to tax or to the premature distribution penalty provided that, after the transfer, the funds transferred continued to be subject to distribution requirements at least as strict as those applicable to them before the transfer.² The final 403(b) regulations revoked Revenue Ruling 90-24 and any exchanges now are allowed under rules that generally are similar to those applicable to qualified plans.³

The final regulations provide that a 403(b) contract of a participant or beneficiary may be exchanged for another 403(b) contract of that participant or beneficiary under the same 403(b) plan if each of the following conditions is satisfied:

(1)the plan under which the contract is issued provides for the exchange;

(2)the participant or beneficiary has an accumulated benefit immediately after the exchange that is at least equal to the accumulated benefit before the exchange, taking into account the accumulated benefit under both 403(b) contracts immediately before the exchange; and

(3)the new contract is subject to distribution restrictions with respect to the participant that are no less stringent than those imposed on the contract being exchanged and the employer enters into an information sharing agreement with the issuer of the new contract.⁴

Under the information sharing agreement, the employer and the issuer agree that from time to time in the future they will provide each other with the following information:

(1)information about the participant’s employment;

(2)information that takes into account other 403(b) contracts or qualified employer plans, such as whether a severance from employment has occurred for purposes of the distribution restrictions and whether the hardship withdrawal rules are satisfied; and

(3)information necessary for the resulting contract to satisfy other tax requirements, such as whether a plan loan satisfies the conditions so that the loan is not a deemed distribution under IRC Section 72(p)(1).⁵

The rule for contracts received in an exchange does not apply to a contract received in an exchange that occurred on or before September 24, 2007, if the exchange (including the contract received in the exchange) satisfied the rules applicable at the time of the exchange.⁶

Under the final regulations, a plan-to-plan transfer from a 403(b) plan to another 403(b) plan is permitted if each of the following conditions is met:

(1)the participant is an employee or former employee of the employer for the receiving plan or, in the case of a transfer for a beneficiary of a deceased participant, the participant was an employee or former employee of the employer for the receiving plan;

(2)the transferring plan provides for transfers;

(3)the receiving plan provides for the receipt of transfers;

(4)the participant or beneficiary whose assets are being transferred has an accumulated benefit immediately after the transfer that is at least equal to the accumulated benefit immediately before the transfer;

(5)the receiving plan imposes restrictions on distributions to the participant or beneficiary whose assets are being transferred that are no less stringent than those imposed on the transferring plan; and

(6)if a plan-to-plan transfer does not constitute a complete transfer of the participant’s or beneficiary’s interest in the 403(b) plan, the receiving plan treats the amount transferred as a continuation of a pro rata portion of the participant’s or beneficiary’s interest in the Section 403(b) plan (e.g., a pro rata portion of the participant’s or beneficiary’s interest in any after-tax employee contributions).¹