403(b) Plans: What is a “grandfathered” account?

A grandfathered account is one that is no longer available under the plan to open new accounts or accept payroll deferrals. Grandfathered accounts will typically still accept rollovers, transfers or exchanges from other retirement accounts eligible for that type of transaction. A grandfathered account may continue to accept contributions if the provider chooses to do so from participants who were contributing to the account prior to 2004 and have not had a break in contributions. Once contributions have stopped, they cannot be started back up again.

When the IRS enacted new regulations that went into effect in 2009 many investment providers no longer wished to offer 403(b) products. The regulations required that all investment providers be authorized under the plan and to enter into an information sharing agreement with the Plan Sponsor. If the provider was unwilling to enter into the information sharing agreement they were no longer included in the plan and not eligible to receive contributions, exchanges, rollovers into the plan or transfers of funds. If the provider no longer wished to accept new payroll contributions but agreed to accept exchanges or transfers of funds the provider could be “grandfathered”.

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