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Question 40 — Grandfathered 403(b)s

Q. My client has a 403(b) account in which no contributions have been made since 2003. I believe this qualifies my client’s account as a grandfathered account; however, am not sure whether that means that the client can self-certify eligibility for loans and distributions. The plan is a public school district 403(b) plan. Does the account qualify as a grandfathered account? Can the client self-certify?

A. Yes, if the provider holding the account was de-selected on or before Jan. 1, 2004, when NO contributions were received by any employee of the employer, your client has a grandfathered orphan account. This will mean that the employer is not required to make that account a part of the 403(b) plan, and any transactions are to take place between your client and the product provider holding the account. 

And, yes, that means your client will self-certify eligibility for requested transactions as permitted under the federal income tax code and IRS regulations. Because the employer is a public school district, ERISA would not apply; thus, there is no responsibility for compliance with ERISA requirements for this plan. 

Follow up Question. If the client causes a violation, such as certifying eligibility for a loan when the client was not eligible for the loan, will the employer incur any liability for the violation?

A. No, the IRS will hold your client responsible for the violation, and, could conceivably disqualify your client’s account. 

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