Rev. Rul. 90-24 Transfers after the Final 403(b) Regulations
Under existing rules, participants in section 403(b) tax-sheltered arrangements generally had the ability to transfer assets out of their plan accounts on a tax-free basis to another investment provider. The new final regulations will have a major (possibly phrased “crippling”) impact on this ability.

It is quite common for a 403(b) arrangement to have a limited number of approved investment vendors that the employer would forward participant elective deferrals and employer contributions accruing under the plan to. If the employee didn't like those vendors, and the employer's plan document (assuming there was one) did not prevent the transfer of assets, the participant could basically transfer his or her assets already in the plan to any investment manager he or she wanted that would accept such investments. The analogy made was, this was equivalent to the participant using a vacuum to suck their assets out the back door of the vault, and sending them to the provider of their choice.

90-24 Transfers May be Made Through September 24, 2007
While we were first warned that a change was coming in the proposed regulations issued in November 2004, it is still problematic for the industry which has routinely utilized such transfers. Unlike most other provisions of the regulations which don't have to be applied until 2009, these provisions become effective 60 days after publication of the Regulations. So the old rules only apply to transfers made on or before September 24, 2007. Based on discussions between industry representatives and the IRS, it appears that the actual transfer of assets does not have to be completed by September 24th, but rather the paperwork providing for the transfer between the transferring and receiving companies must be completed by that date.

Compliance Reasons for the Change
The change is brought about by the new distribution compliance requirements under the regulations, to insure that assets are only distributed to participants at the correct times and that proper tax reporting is done. There was no guarantee under the existing system, that once the assets were transferred, that proper restrictions on distributions, which are different for each contribution source, were properly applied. Apparently, since the transfer occurred between the investment providers, the employer didn't even know that it occurred and had no knowledge about where the assets were actually being held.

Transfers after September 24, 2007
After September 24, 2007, transfers will only be allowed if the product providers wishing to receive the transfers, have entered into a written agreement with the employer that is sponsoring the 403(b) plan, to share information that is required for tax reporting and compliance purposes. Since the bulk of the regulations do not take effect until January 1, 2009, the employer theoretically would have until that date to establish such agreements, and incorporate the appropriate language into their plan documents. To the extent that transfers were to occur in the interim, the employer's documentation would also have to reflect them in order for them to be considered tax-free transfers and not taxable distributions. To protect themselves and the qualification of their arrangements, employers may severely limit or even eliminate transfers during the interim period.

IRS Soliciting Comments
Participants are already expressing concern that they may no longer work with the investment providers of their choice, rather the employer will control where their accounts may be invested. While this is pretty much the way investments work within qualified plans under Code Section 401(a), those in the 403(b) arena that have had more flexibility are now expressing concerns about losing it. Despite issuing final regulations and having received comments on this issue based on the proposed regulations, the IRS is nonetheless soliciting comments on the transfer issue from providers in the marketplace.

Final 403(b) Regulations