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Merger of 401(k) Plan into 403(b) Plan - possible under new law?


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A non-profit client sponsors a 403(B) plan, to which it makes employer contributions. It has recently acquired a for-profit subsidiary which has a 401(k) Plan. I understand that under EGTRRA, signed on June 7, 2001, eligible rollover distributions from a 403(B) may be rolled over into a 401(k) and vice versa.

The client would like to consolidate the two plans into one, but I am not sure that the new law gets me there. The problem, as I see it, is that if I terminate either plan, the rule that prohibits distributions of deferrals while the individual still works for the control group and maintains another defined contribution plan would prohibit the distribtuion and rollover. Is it possible to do a plan merger now - i.e. freeze the 403(B) plan and transfer the assets to the 401(k)?

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Guest Tom Geer

No, it doesn't. You can terminate the 403(B) plan and allow rollovers/direct transfers to the new plan, but you can't merge them. This includes a merger with a cash opt-out.

What you can do is terminate the 403(B) and make the default distribution the 401(k) plan. That will get the assets over for those who don't do anything, as well as those who want their money in the 401(k) plan.

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Thanks for the reply. I was afraid that the merger would not work- but what about terminating the 401(k) and then allowing distributions on the theory that the client does not sponsor another defined contribution plan. The participants could then rollover their accounts to the 403(B) if they want, or rollover to an IRA.

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Guest Tom Geer

How do you get the for profit employees into the 403(B)? The basic requirement for 403(B) is that the employer be a 501©(3) organization (or a school district or a minister). The 401(k) plan, on the other hand, can cover both the tax exempt and the taxable employers.

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Thanks for your response.

The client will hire the employees under the 501©(3) entity, and leave the for-profit as a shell for now. I see now that I did not include that fact.

It seems to me that so long as no entity in the control group sponsors a qualified defined contribution plan, the 401(k) can be terminated and assets distributed. I am a little concerned that the 403(B) plan might be classified under ERISA as a defined contribution plan. If that is the case, then merger should be an option.

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Guest Tom Geer

Bad news. The 403(B) is a DC plan under ERISA and under the "same desk rule" exception for plan terminations. The same desk rule was repealed effective for plan years beginning after 12/31/2001, but there has to be a severance from employment because the restrictions on termination-reestablishment transactions was tinkered with but not repealed. However, it's pretty clear that moving the taxable entity's employees to the 501©(3) would be a severance allowing a distribution, and the fact that there's a termination as well should not affect that.

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  • 2 weeks later...

Hi Deb! Call me in Ft. Wayne. We've worked through a few of these b/k/a issues since pension reform.

Don't believe you can merge these plans, as the new rules require a rollover to combine plan types. The real issue is whether you can force a rollover upon the termination of an "a" plan. A sort of negative election plan to plan direct rollover- which is a topic worth looking over.

But before getting to that you have your successor plan problems. I think you have a sound position that the for profit sub is not technically part of the "employer" for successor plan purposes. If your tax exempt is one with no voting stock (I recall that Michigan law has such "membership" not-for profits), you'll find that 414(B) and © do not appear to apply. The IRS deals with this in the non-discrimination/coverage areas with Notice 89-23, where the standard "controlled group" rules were extended to tax exempts for testing purposes. I'm not aware that the Service has ever extended that controlled group approach to other issues-such as successor plans (though I'm sure someone will tell me if I'm mistaken). Combine this with the historical common law employee approach to tax exempts (where each 501©(3) org within an umbrella organization have been treated independantly for 403(B) purposes), and the fact that this approach doesn't violate the policy concerns underlying 1.401(k)-1(d)(3), and you may have your solution. Terminate the 401(k) and do rollovers to the 403(b.

Then you address whether there can be forced "rollovers" to the b.

In your case, because you have the termiantion of employment without the same desk rule, a forced rollover may still be your solution to not maintaining two plans-even without worrying about successor plans.

If neither approach works for your client, there are ways to minimize the problems associated with having two plans. You set up the k and b plan investments and admin to be very similar, and freeze the k plan. Encourage participants to roll the money to the b plan with some incentives like charging admin fees on the k that aren't on the b. You end up with the better b (with double catchup, no ADP, limited 5500 reporting and no MEA) and minimized added expense for the k.

You can do this now because of changes in the 403(B) market. You can now hookup a large number of unrelated mutual funds (outside of an annuity contract) with the fixed fund in a group annuity contract and allow daily trading between them all(this is generally available in the mid to larger case market). Looks like most 401(k) plans. This, combined with the ability (of some of us) to administer ks and bs on the same platform keeps things manageable.

Hope all is well with you!

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  • 10 years later...
Guest Rob S

I have a similar question, but a little different.

The client has a 401(k) they would like to discontinue. They also have an ERISA 403(b) and a 401(a) matched plan. Can they merge the 401(k) plan into the 401(a) plan and then discontinue employee 401(k) contributions? They would retain the 403(b) plan for ongoing participant contributions and the 401(a) plan for the matching contributions.

I believe they will be subject to the same desk rule.

Don't believe you can merge these plans, as the new rules require a rollover to combine plan types. The real issue is whether you can force a rollover upon the termination of an "a" plan. A sort of negative election plan to plan direct rollover- which is a topic worth looking over.

But before getting to that you have your successor plan problems. I think you have a sound position that the for profit sub is not technically part of the "employer" for successor plan purposes. If your tax exempt is one with no voting stock (I recall that Michigan law has such "membership" not-for profits), you'll find that 414(B) and © do not appear to apply. The IRS deals with this in the non-discrimination/coverage areas with Notice 89-23, where the standard "controlled group" rules were extended to tax exempts for testing purposes. I'm not aware that the Service has ever extended that controlled group approach to other issues-such as successor plans (though I'm sure someone will tell me if I'm mistaken). Combine this with the historical common law employee approach to tax exempts (where each 501©(3) org within an umbrella organization have been treated independantly for 403(B) purposes), and the fact that this approach doesn't violate the policy concerns underlying 1.401(k)-1(d)(3), and you may have your solution. Terminate the 401(k) and do rollovers to the 403(b.

Then you address whether there can be forced "rollovers" to the b.

In your case, because you have the termiantion of employment without the same desk rule, a forced rollover may still be your solution to not maintaining two plans-even without worrying about successor plans.

If neither approach works for your client, there are ways to minimize the problems associated with having two plans. You set up the k and b plan investments and admin to be very similar, and freeze the k plan. Encourage participants to roll the money to the b plan with some incentives like charging admin fees on the k that aren't on the b. You end up with the better b (with double catchup, no ADP, limited 5500 reporting and no MEA) and minimized added expense for the k.

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  • 7 months later...
I have a similar question, but a little different.

The client has a 401(k) they would like to discontinue. They also have an ERISA 403(b) and a 401(a) matched plan. Can they merge the 401(k) plan into the 401(a) plan and then discontinue employee 401(k) contributions? They would retain the 403(b) plan for ongoing participant contributions and the 401(a) plan for the matching contributions.

I believe they will be subject to the same desk rule.

Don't believe you can merge these plans, as the new rules require a rollover to combine plan types. The real issue is whether you can force a rollover upon the termination of an "a" plan. A sort of negative election plan to plan direct rollover- which is a topic worth looking over.

But before getting to that you have your successor plan problems. I think you have a sound position that the for profit sub is not technically part of the "employer" for successor plan purposes. If your tax exempt is one with no voting stock (I recall that Michigan law has such "membership" not-for profits), you'll find that 414(B) and © do not appear to apply. The IRS deals with this in the non-discrimination/coverage areas with Notice 89-23, where the standard "controlled group" rules were extended to tax exempts for testing purposes. I'm not aware that the Service has ever extended that controlled group approach to other issues-such as successor plans (though I'm sure someone will tell me if I'm mistaken). Combine this with the historical common law employee approach to tax exempts (where each 501©(3) org within an umbrella organization have been treated independantly for 403(B) purposes), and the fact that this approach doesn't violate the policy concerns underlying 1.401(k)-1(d)(3), and you may have your solution. Terminate the 401(k) and do rollovers to the 403(b.

Then you address whether there can be forced "rollovers" to the b.

In your case, because you have the termiantion of employment without the same desk rule, a forced rollover may still be your solution to not maintaining two plans-even without worrying about successor plans.

If neither approach works for your client, there are ways to minimize the problems associated with having two plans. You set up the k and b plan investments and admin to be very similar, and freeze the k plan. Encourage participants to roll the money to the b plan with some incentives like charging admin fees on the k that aren't on the b. You end up with the better b (with double catchup, no ADP, limited 5500 reporting and no MEA) and minimized added expense for the k.

I don't know the answer, but I though the same desk rule was no longer applicable ? I could be wrong

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