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Combine existing 403(b) and 401(a)?


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501©3) Employer currently has separate profit sharing plan ('ER $) and 403(b) plan (only employee deferrals). The PSP will only make contributions to employees who participate in the 403(b) (ACP required).

Employer (or someone advising them) now wants to have one plan - an ERISA 403(b) - Not interested in a 401(k). Can this be accomplished by -

1. adding 403(b) deferrals to the qualified PSP? Does this mean the existing 403(b) elective deferrals must remain in the existing 403(b) plan unless they can be rolled via an eligible rollover distribution? OR, conversely

2. add an employer contribution to the existing 403(b) plan, terminate the PSP and rollover distributions to the 403(b)?

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Concerning your #2, a plan may provide - or, to the extent not precluded by the plan or applicable law, a plan administrator's procedure may provide - a "default" on whether an eligible rollover distribution (which might include a terminating plan's final distribution) will be paid to the distributee or paid to an eligible retirement plan (if not subject to an IRC 401(a)(31)(B) mandatory $1,000-to-$5,000 rollover to an IRA). See 26 C.F.R. 1.401(a)(31)-1/Q&A-7. If such a default is payment to an eligible retirement plan, the plan administrator's IRC 402(f) notice and an explanation of the default provision or procedure must identify the receiving plan, which might be a 403(b) plan. Although this isn't a merger, it can have some practical effects that achieve an employer's goal of maintaining one plan going forward.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Thanks for the reply. I understand a default provision can be included, but doesn't the terminated plan have to allow participants to receive a distribution? But if they make no election that's when the default is applied.

Or is it a matter of timing - establish the ERISA 403(b) first and then have the plan sponsor exercise their fiduciary authority by transferring the PSP's assets/account balances to the ERISA 403(b) plan?

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The default-rollover idea depends on both the terminating plan and the receiving plan having the right provisions that support the rollover.

First, a terminating plan doesn't allow a participant to receive a distribution, but instead requires the participant to receive a distribution. Even for a plan that no longer has any profit-sharing contributions or other benefit accruals, a qualified retirement plan isn't terminated until it pays the money (or delivers the property or rights) of its final distribution. Many employers' plan amendments to implement a plan termination provide that the final distribution is a single-sum distribution. However, I've seen (and written) provisions for a final distribution that set a series of payments long enough to meet an investment-related purpose but short enough that the distribution still is an eligible rollover distribution. The notice of such a final distribution gives a participant a choice between receiving the distribution as a payment of money or as a payment of a direct rollover to the eligible retirement plan specified by the participant.

It's important to keep in mind the likelihood that something less than all of the terminating plan's amounts would move to the retirement plan that's named as the default. Some participants choose against a rollover, and some choose a rollover to a retirement plan other than the default. But I've seen situations in which 80% to 99% of the terminating plan's amounts became rollover contributions (not a merger or transfer) to the "suggested" plan.

Of course, the receiving plan must exist before it can receive rollover contributions, and it's smart to make sure that the receiving plan properly can receive, and is willing to accept, the rollover contribution. If there is any significant doubt, the employer writes or amends the documents of the receiving plan at the same time that it writes the plan amendment of the terminating plan.

The employer can write the terminating plan's documents and notices so that the plan administrastor had no choice (and thereby little fiduciary responsibility) concerning which retirement plan receives a default rollover of a participant who had not communicated his or her instructions. Nonetheless, an employer likely uses this default-rollover idea because the employer believes that the "suggested" retirement plan is good for a typical non-instructing participant.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Guest taxesquire

Wow! This topic seemed to get pretty confusing to me!

I do not know if you can MERGE a PSP into a 403(b), which I think is what you really want to do. You can definitely start contributing to the 403b and cease contributiing to the PSP. Then, if you can't merge a PSP into a 403b, you can either terminate the PSP and give participants the option to take distributions or roll them over, or you can freeze the PSP. It's probably more expensive to freeze it because you'll have continuing administrative obligations.

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  • 1 year later...
Guest scotlyn911

If anyone is wondering, a 403(b) cannot accept assets from a qualified plan.

Treas. Reg. 1.403(b)-10(b)(1)(i):

General rule. If the conditions in paragraph (b)(2) of this section are met, a section 403(b) contract held under a section 403(b) plan is permitted to be exchanged for another section 403(b) contract held under that section 403(b) plan. Further, if the conditions in paragraph (b)(3) of this section are met, a section 403(b) plan is permitted to provide for the transfer of its assets (including any assets held in a custodial account or retirement income account that are treated as section 403(b) contracts) to another section 403(b) plan. In addition, if the conditions in paragraph (b)(4) of this section (relating to permissive service credit and repayments under section 415) are met, a section 403(b) plan is permitted to provide for the transfer of its assets to a qualified plan under section 401(a). However, neither a qualified plan nor an eligible governmental plan under section 457(b) may transfer assets to a section 403(b) plan, and a section 403(b) plan may not accept such a transfer. In addition, a section 403(b) contract may not be exchanged for an annuity contract that is not a section 403(b) contract. Neither a plan-to-plan transfer nor a contract exchange permitted under this paragraph (b) is treated as a distribution for purposes of the distribution restrictions at §1.403(b)-6. Therefore, such a transfer or exchange may be made before severance from employment or another distribution event. Further, no amount is includible in gross income by reason of such a transfer or exchange.

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  • 1 month later...
Guest tpaadmin
If anyone is wondering, a 403(b) cannot accept assets from a qualified plan.

Treas. Reg. 1.403(b)-10(b)(1)(i):

General rule. If the conditions in paragraph (b)(2) of this section are met, a section 403(b) contract held under a section 403(b) plan is permitted to be exchanged for another section 403(b) contract held under that section 403(b) plan. Further, if the conditions in paragraph (b)(3) of this section are met, a section 403(b) plan is permitted to provide for the transfer of its assets (including any assets held in a custodial account or retirement income account that are treated as section 403(b) contracts) to another section 403(b) plan. In addition, if the conditions in paragraph (b)(4) of this section (relating to permissive service credit and repayments under section 415) are met, a section 403(b) plan is permitted to provide for the transfer of its assets to a qualified plan under section 401(a). However, neither a qualified plan nor an eligible governmental plan under section 457(b) may transfer assets to a section 403(b) plan, and a section 403(b) plan may not accept such a transfer. In addition, a section 403(b) contract may not be exchanged for an annuity contract that is not a section 403(b) contract. Neither a plan-to-plan transfer nor a contract exchange permitted under this paragraph (b) is treated as a distribution for purposes of the distribution restrictions at §1.403(b)-6. Therefore, such a transfer or exchange may be made before severance from employment or another distribution event. Further, no amount is includible in gross income by reason of such a transfer or exchange.

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Guest tpaadmin

Hi. I am new to this message board. We are in a similar situation with a client and we use TAG for a lot of our information. Their rollover chart has where you can roll from a qualified plan to a 403(b) plan and you can roll from a

403(b) plan to a qualified plan. That's why I am questioning what you posted on Jan 20, 2009 about how a 403(b) can't accept assets from a qualified plan. Thanks.

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Guest GTR-RFS

Kevin C is correct,

A Plan Sponsors decision to move the plan assets from provider to provider or from trust to trust is a "Transfer". An individuals decision to move there money from one plan to another is a "Rollover". That individuals must have a distributable event to be able to roll money from one qualified plan to another. If that employee has a distributable event they can (assuming the new / other plan allows rollovers) roll there money from a 403(b) to a 401(k)/PSP. Just by freezing or terminating one plan doesn't give an employee a "distributable" event though. Also the employer can't do a plan to plan transfer from a 401(k)/PSP to a 403(b) as outlined earlier.

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