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Patricia Neal Jensen

Split 403(b) Plan into two plans?

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I have a nonprofit client with a 403(b) plan and all employees are eligible.   The client is anticipating that its participant count will be over 100 at the next plan year end (we have informed them about the 120 count rule for the plan's first year at the large plan status).  They have a logical organizational structure reason for splitting this plan into two  smaller plans.   Our firm has done this many times for 401(k) plans but this is the first situation which has presented itself in 403(b).  Has anyone done this for a 403(b)?  Any comments?

Thanks!

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Do it the same way you do with 401(k)s or better yet get them to change to 401(k) where they can impose an eligibility waiting period and probably continue to be under the audit threshold with just 1 plan.

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I've never done so have not thought through, but I would point out that assuming the funds are invested in annuity contracts or individual custodial accounts, you don't have the ability as you would with 401(a) to base the plans' separateness on separate trusts. Having said that, if the plans had separate documents, you could probably do it.

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Thank you, both!

  Flyboyjohn.."changing" to a 401(k) is a complex and sometimes impossible problem.  Also deferral testing is a killer for that idea.    I agree generally with the concept if we were starting with a blank slate.

Luke Bailey...From my research so far I think 2 completely separate documents with separate investments would be required.  Although we don't have trusts, we still may be able to attribute specific assets to specific plans.  Will see if the client thinks this is worth more work and research.

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Patricia, why not set up a new 403(b) that would include all employees hired after 1/1/18 and amend the prior plan to exclude anyone hired after 1/1/18.  That would fix the size of the "old" plan and not have to worry about the existing contracts having to somehow be split into two plans.  I am currently dealing with a similar issue and while I do very little 403(b) work (and this one is a freebie for a local community center that I am involved with as a volunteer), I am investigating this very issue with a friend who runs a firm in Calif that does LOTS of these and it seems to be a possible solution.

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Have you considered the fiduciary issues associated with a split?  Will the administrative, recordkeeping, and investment costs borne by the plan's participants and beneficiaries increase because of the split?  Who would pay the audit fees - the plan or the employer?  You may be able to argue that the decision to split the plans is a settlor function, but the implementation of a settlor decision is not.  I wouldn't do a split if it would disadvantage the plan's participants.

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Splitting plans was discussed at the 2000 ASPPA Meeting - during Q and A's. They indicated it "raises issues or avoidance and evasion." We only do it if we have another reason for doing so or if it is a new Plan situation.

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Beware!  Larry, I don;t mean any disrepsect, but your "arbirtray" bifurcation to me seems the likely target of the following Q&A. The one time I did this was for a union and a non-union plan, and of course there are a hundred reasons to have separate plan for union and non-union (ok just one big one called collective bargaining).   I have also seen it done for different legal entities.  Anything else and I start to get nervous about the implications of this Q&A.  Now I know, I know, this is "just" a Q&A.  But still being right will not make me feel any better if I end up in a protracted debate with the DOL.

the question was raised at the 2000 annual ASPPA meeting, in the general Q&A session. The questions at this session were answered by Joe Canary, Scott Albert, Lou Campagna and Mabel Capolongo of the Department of Labor:

Question 5: A 401(k) plan has 150 participants. The plan must file a full 5500 and have an audit by an accounting firm. Due to the cost of the audit ($10,000 or $15,000), my suggestion to the client is to split the plan into two plans, each with 75 participants. For 2000 there will be an audit. The plans could be split into two plans on December 31, 2000. Therefore, on January 1, 2001, both plans have less than 100 participants and no audit required. For tax qualification testing, they can be permissively aggregated. In fact, my plan is to administer as if it was one plan and just separate for 5500 purposes. Is my conclusion correct?

Answer: This question raises issues of avoidance and evasion. It is not certain that you really have two plans for purposes of Title I of ERISA in this instance--even if there may be two plans for Internal Revenue Code purposes. In Advisory Opinion 84-35A, the Department stated it would consider, among others, the following factors in determining whether there is a single plan or several plans in existence: who established and maintains the plans, the process and purposes of plan formation, the rights and privileges of plan participants and the presence of any risk pooling, i.e., whether the assets of one plan are available to pay benefits to participants of the other plan. This Advisory Opinion also notes that the Internal Revenue Service has cited the existence or absence of risk pooling between funds as relevant to the determination of single plan status. See §1.414(1)-1(b) 26 C.F.R. §1.414(1)-1(b). In DOL Advisory Opinion 96-16A, the Department stated its position that whether there is a single plan or multiple plans is an inherently factual question on which the Department ordinarily will not opine in the Advisory Opinion process

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I wrote the question (I was in charge of the Q&As in those days). We discussed it in advance and they took a very cautious PUBLIC stance but in private, if we really ran it as two plans, with two separate trusts (this is 401(a) and not 403(b)), they privately said it would be very hard for them to argue it was really one plan.  It had to be TWO PLANS; it had to be substance not just form.  They were much less concerned about plans that were not split, but that organically grew separately. So if you dealt with it in advance and never got to the audit stage, they were much less concerned about the issue.  So the new plan situation (which I suggested here) should fly.  FWIW.

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Art: In my scenario I see no disadvantage of any kind to the participants.  They are indifferent and the employer was paying the auditing fees, but if the plan paid the fees, the participant situation is enhanced not disadvantaged. The administrative costs are minimal (an extra document and an extra 5500 filing).  Many thousands of dollars less than the audit costs. And again, happily absorbed by the employer to save the auditing costs.

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I'm definitely more conservative on something like this.  Not worth it for me personally to advise anything that might go against the DOL's public comments.

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attached dol q&a with aba from 2009 presents a different perspective and suggests two plans sponsored by an employer are okay even if it results in avoiding the audit requirement.

temp.pdf

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20 hours ago, austin3515 said:

Now we’re talkin!  Thanks for sharing this!

And now you don't have to be "conservative" and  will look brilliant to your client and save them THOUSANDS of dollars.  The 2009 Q&A exactly represents what we talked about in private but that particular group of DOL officials did not want to say publicly at that time. Nice to know that, a few years later, they found the ..... gumption! :-)

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Larry:  Just something to consider.  With all of the focus on plan expenses you would want to be sure that what you do doesn't increase costs for participants.  For example, you would want to know in advance whether splitting the assets would increase internal investment expense ratios (e.g., if the plan would no longer qualify for institutionally priced investments).  Just something to consider.

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Art: Yup; completely aware of that issue.  For most of our plans, it is just not applicable. Thanks.

 

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On ‎3‎/‎20‎/‎2018 at 4:26 PM, Larry Starr said:

Patricia, why not set up a new 403(b) that would include all employees hired after 1/1/18 and amend the prior plan to exclude anyone hired after 1/1/18.  That would fix the size of the "old" plan and not have to worry about the existing contracts having to somehow be split into two plans.  I am currently dealing with a similar issue and while I do very little 403(b) work (and this one is a freebie for a local community center that I am involved with as a volunteer), I am investigating this very issue with a friend who runs a firm in Calif that does LOTS of these and it seems to be a possible solution.

I like this solution. Larry, Can you let us know what you find out from your friend? I'm always cautious about something that seems to good to be true, but I can't see any landmines, at least in a deferral only plan. Let's assume there are matching and/or nonelective contributions, and that there are one or more HCE's. Are there any special coverage or  nondiscrimination issues I'm missing here, assuming the plan provisions are identical in all other respects - other than normal coverage/nondiscrimination testing on each plan?

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I think one thing that is very relevant and often doesn't get the attention it deserves - how do you explain this to the employees??

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Austin, I don't worry about "explaining" this (or many other things that aren't their concern) to the employees.  We simply tell them the fact: "there are two plans, one for those hired after XXX date and one for those before. The benefits are the same and we do that for logistical reasons" or some such phrase. Employees are just not going to care.

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9 hours ago, Belgarath said:

I like this solution. Larry, Can you let us know what you find out from your friend? I'm always cautious about something that seems to good to be true, but I can't see any landmines, at least in a deferral only plan. Let's assume there are matching and/or nonelective contributions, and that there are one or more HCE's. Are there any special coverage or  nondiscrimination issues I'm missing here, assuming the plan provisions are identical in all other respects - other than normal coverage/nondiscrimination testing on each plan?

You simply have to test in the aggregate, so no special issues.

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Hopefully the employees will "just trust you."  Some do, some don't.  I cant imagine any of my clients signing on for that.  The more out of left field the suggestion, the more they get turned off.

Plus what do you do in 15 years when the "old plan" has hardly any employees left?  Start a 3rd plan? 

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For another commentary about whether to treat plans as distinct when the circumstances show no business reason for more than one plan, see Q&A 14 in the attached American Bar Association session.

The hypo invites a substance-over-form interpretation.  And the ABA's format for these unofficial Q&A sessions requires the questioner to submit a proposed answer.  The proposed answer set up some reasoning an EBSA speaker could use to support saying one must look through the multiple plans and treat them as one that needs an independent qualified public accountant's audit.

Yet the EBSA people said it's okay to follow the contrived plans.

 

dol_2009.authcheckdam.pdf

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