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non-ERISA 403b to 401k


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Prospective client has a current NON-ERISA 403b plan. He wants to establish a 401(k) plan. Current non-ERISA 403b plan has loans.

1. Can the cleint adopt a 401(k) plan while sponsoring a non-ERISA 403b plan?

2. Am I correct that the client cannot merge the non-ERISA 403b plan into the 401(k) plan?

3. If client terminates the non-ERISA plan does it need to wait 12 months to establish the 401(k) plan?

4. If the 403b plan is terminated, can employees roll the 403b assets, including loans, into the 401(k) plan?

Thank for any guidance you can provide.

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Why is the 403(b) plan not subject to ERISA? Is it a church plan? Alternatively, is it a non-ERISA plan because it only accepts employee pre-tax deferrals and the employer has a limited role?

If it is the latter, then it is not sponsored by the employer. The employer may cease letting employees defer to it, but the employer does not have the power to terminate a plan that is not sponsored by the employer.

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The issue isn't whether the IRS lets the employer terminate a 403(b) plan. What I'm questioning is whether the employer who is not acting as a plan sponsor (which is why the 403(b) program is not a plan subject to ERISA) can terminate the 403(b) arrangement. I don't think the employer can do so, although confirmation from others on this point would be appreciated.

Note that the 403(b) plan in Rev. Ruling 2011-7 was non-ERISA because it was a governmental plan, not because the employer was not acting as the plan sponsor. It is a different set of facts from your situation.

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I respectfully disagree w/ the conclusion that a non-ERISA 403(b) plan cannot be terminated.

From the preamble of TD 9430:

"Termination of a Section 403(b) Plan

The final regulations adopt the provisions of the 2004 proposed regulations permitting an employer to amend its section 403(b) plan to eliminate future contributions for existing participants, and allowing plan provisions that permit plan termination and a resulting distribution of accumulated benefits, with the associated right to roll over eligible rollover distributions to an eligible retirement plan, such as an individual retirement account or annuity (IRA). Comments on the rules in the 2004 proposed regulations regarding plan termination were favorable. In general, the distribution of accumulated benefits is permitted under these regulations only if the employer (taking into account all entities that are treated as a single employer under section 414 on the date of the termination) does not make contributions to any section 403(b) contract that is not part of the plan during the period beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan. However, if at all times during the period beginning 12 months before the termination and ending 12 months after distribution of all assets from the terminated plan, fewer than 2 percent of the employees who were eligible under the section 403(b) plan as of the date of plan termination are eligible under the alternative section 403(b) contract, the other section 403(b) contract is disregarded. In order for a section 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan. A distribution for this purpose includes delivery of a fully paid individual insurance annuity contract."

Note that nothing in this nor in Reg 1.403(b)-10(a) precludes a non-ERISA plan from being terminated.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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I was wrong.

What the IRS says doesn't really matter, but the DOL has said that terminating a 403(b) plan does not jeopardize the non-ERISA status of the plan. See the last paragraph in the Analysis section of Field Assistance Bulletin 2007-2, located at http://www.dol.gov/ebsa/regs/fab2007-2.html.

Maybe someone else wants to take a crack at the questions in the original post and get this thread back on track. I'll let someone else go first: I think my credibility may be shot for this thread! :blink:

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MWeddell - That FAB is a good find.

1. Can the cleint adopt a 401(k) plan while sponsoring a non-ERISA 403b plan?

http://benefitslink.com/boards/index.php?/topic/29898-what-are-the-benefits-for-a-nonprofit-to-offer-a-401k-and-403b-plan/

2. Am I correct that the client cannot merge the non-ERISA 403b plan into the 401(k) plan?

See Reg 1.403(b)-10, search on "401". You'll find where it discusses transfers to a 401(a) plan but if you follow it thru, you'll see it's only for limited circumstances involving "purchases of permissive service credit" in a governmental plan. Mergers are outside my area of knowledge so I'll let you search from there.

3. If client terminates the non-ERISA plan does it need to wait 12 months to establish the 401(k) plan?

401(k) and 403(b) have completely separate successor plan rules. See Reg 1.403(b)-10(a): can't do another 403(b) but no restriction on a 401. The (k) rule is at 1.401(k)-1(d)(4) which you'll find deals solely with a successor after terminating a (k) plan (so not relevant to your terminating (b) plan).

4. If the 403b plan is terminated, can employees roll the 403b assets, including loans, into the 401(k) plan?

Probably. I'm confident they can rollover a loan offset and am mostly certain they can rollover the loan note (NOTE: a loan note (as opposed to a loan offset), per Reg 1.401(a)(31)-1 Q&A-16 can only be rolled to a 401(a) trust or a 403(a), not to a 403(b); but you're coming from a 403(b) to a 401(a) trust).

Reg 1.402(c )-2 Q&A-2 includes a 403(b) in the definition of an "eligible retirement plan". Reg 1.402(c )-2 Q&A-9 discusses the rollover of a plan loan offset to an "eligible retirement plan". And 1.401(a)(31)-1 Q&A-16 also discusses the rollover of a plan loan offset.

You should backtrack the applicability of 401(a)(31), 402(c ) and 72(p) to 403(b) plans. You should start in Reg 1.403(b)-7 and work from there. I'm pretty sure it all cross-references.

EDIT: I also wonder but didn't look if anything in 403(b) restricts the nature of distributions such that a loan note could not be distributed.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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