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two NFPs merge, one with a 401k plan... what happens to that money?


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A non-profit client of mine with a 403b absorbed a smaller NFP with a 401k plan.  I told them that the two plans couldn't merge.  The participants are all being retained as employees, but obviously under the surviving employer NFP.  I've still got nightmares of the same-desk rule swimming in my head - are these people considered "terminated" and therefore can roll their 401k money into the 403b plan as rollovers?  Or is an IRA their only option?  Thanks.

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The employees can't be considered to have terminated employment.  However, their 401(k) plan can be terminated.  At that point, they will need to take a distribution which they can roll over to the 403(b) plan if they want to.   

There is no rule that prohibits a rollover of an amount obtained on a plan termination to another plan of the same employer. Code section 401(k)(10)(A) and Treas. Reg. § 1.401(k)-1(d)(4)(i) provide the rule that you can't terminate a 401(k) plan and distribute assets if you have an alternative plan.  However, Treas. Reg. § 1.401(k)-1(d)(4)(i) specifically provides that a 403(b) plan is not an alternative plan for this purpose.

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If the absorbed organization discontinues and terminates its 401(k) plan, no severance-from-employment is needed, and the plan pays its final distribution as an involuntary distribution (even to those participants who have not reached any retirement age).

A single-sum final distribution paid or payable in money should be eligible for a rollover into any eligible retirement plan, including a 403(b) plan.

No alternative defined contribution plan.  A distribution may not be made under paragraph (d)(1)(iii) of this section [plan termination] if the employer establishes or maintains an alternative defined contribution plan.  For purposes of the preceding sentence, the definition of the term “employer” contained in § 1.401(k)-6 [which further cross-refers to § 1.410(b)-9, which includes aggregations under sections 414(b), (c), (m), and (o)] is applied as of the date of plan termination, and a plan is an alternative defined contribution plan only if it is a defined contribution plan that exists at any time 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 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees who were eligible under the defined contribution plan that includes the cash[-]or[-]deferred arrangement as of the date of plan termination are eligible under the other defined contribution plan, the other plan is not an alternative defined contribution plan.  In addition, a defined contribution plan is not treated as an alternative defined contribution plan if it is an employee stock ownership plan as defined in section 4975(e)(7) or 409(a), a simplified employee pension as defined in section 408(k), a SIMPLE IRA plan as defined in section 408(p), a plan or contract that satisfies the requirements of section 403(b), or a plan that is described in section 457(b) or (f).  26 C.F.R. § 1.401(k) 1(d)(4)(i) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(d)(4)(i).

In a situation of the kind described, some charities and practitioners might consider designing and documenting both plans so the default on a non-instructing participant’s involuntary final distribution is a rollover into the absorbing organization’s 403(b) plan.  See 26 C.F.R. § 1.401(a)(31)-1/Q&A-7 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(31)-1.

Although that is not a merger, it can have some practical effects that achieve an employer’s goal of maintaining one individual-account retirement plan.  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.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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