Over the last several years, the answer has been a little of both. Beginning with the 2009 effective date of the IRS overhaul to the 403(b) regulations, it was establised that 403(b) plans could, indeed, be terminated. However, that legal fact has been somewhat of a practical fiction for plans funded by individual contracts. The reason being that sponsors of such arrangements had no authority to compel distribution of those individual contracts. Bob Toth has an excellent explanation of the conundrum here.
Today's publication of IRS Revenue Ruling 2011-7 takes a step in the right direction by allowing individual contracts in terminated 403(b) plans to be treated as distributed in certain circumstances. Rather than re-create the wheel, I will again defer to Mr. Toth's explanation here of the clarifications provided as well as what remains unresolved.