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having 2 403b plans?


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Just had an initial call with the financial advisor, so some of this is subject to change as I get more details, but it sounds like:

> NFP has a 403b with a large insurance co and is tired of bad service, high fees, etc.
> NFP is looking into a new recordkeeper and wants to move the plan, but the insurance co says that the accounts are individual annuities (though they are the only provider and there is a company contribution, so this should be an ERISA plan with all that entails) so the plan sponsor does not have the right to pick up all the accounts and move them - each participant would have to agree to do so.

Is there anything legally preventing the opening of a new 403b plan and saying that effective 7/1/22, all deferrals go to New Plan at New Recordkeeper, and all participants have to complete a new deferral election form?  Any participant who wants to make a transfer from Old Plan to New Plan may do so, but not vice-versa.  Old Plan would still exist separately for document, 5500 and whatever other purposes; if someone wanted a plan loan, for example, they would only be eligible for the balance in the plan they are applying in.  The real problem is that the extra expense of two plans will likely offset the savings the New Recordkeeper is offering.  But at this point, I'm just trying to figure out options.

I know this isn't a perfect solution, but we've been burned several times with trying to manage a plan where there are still accounts in the old recordkeeping platform and trying to get information from them each year is a complete hassle.  You think "oh, the balances will just decline each year, it won't be that bad"... five to seven years later, and they're still going strong!

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Might the charitable organization, acting as a plan’s sponsor, also amend the old plan and create the new plan to provide:

Payroll-deduction repayment of a participant loan is available only under the new plan, not the old plan?

An in-plan conversion from non-Roth to Roth is available only under the new plan, not the old plan?

Not knowing the charity’s particular facts and circumstances, I do not say either idea is feasible; rather, only that your consulting might evaluate those and other opportunities.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Good afternoon!

This is quite common in 403(b).    There is nothing preventing you from establishing a new plan etc., but it will mean that the client now has two sets of fees etc. and responsibilities.  I understand your impatience with the problems this situation entails but they really need a TPA who can administer the entire plan with all of its investments.  They also need to find out if the insurance company will unbundle this plan to permit the use of a TPA.  It is possible to terminate the ins. co. 403(b) and wait 12 months to start another 403(b).  I have never had a client willing to do this, but it may be the only way out.

Other comments:  Payroll deduction of loans is not necessarily seen as desirable by plan participants in this situation. In-plan Roth conversions are also not likely to be incentive enough to get a participant to move assets.   Especially since in the situation you describe,  these contracts are likely to have termination penalties etc.

Good luck!   Don't hesitate to ask if more questions or facts come up.

Patricia Neal Jensen, JD, VP

Nonprofit plan leader FuturePlan Ascensus

patricia.jensen@futureplan.com 

 

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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We've had this situation before and the clients wanted to leave the insurance company but was locked in by the annuities. Then, the insurance company began a campaign of calling individual annuitants on the phone to get them to keep their accounts (which were fairly high fee and subject to a Ten-Year withdrawal pattern).

I agree with what has been said, best to start a new plan and move forward with that--hard to believe that ten-year minimum withdrawal rules exists in this era of nearly instantaneous withdrawals.

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You wouldn't necessarily even need a new plan for this.  It is common to have more than one annuity carrier in the same plan, and to cut off new contributions to an annuity without requiring people to move the old money.  Using just one plan avoids the need for two Forms 5500, etc.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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And here’s another variation:

1.    The plan’s sponsor decides that every individual annuity contract no longer is a plan investment alternative.

2.    The plan’s administrator informs each affected participant that her annuity contract will be delivered as a direct rollover to the eligible retirement plan she specifies or, absent a proper direction (or if the other plan refuses the rollover), delivered to the participant (no later than 90 days after the annuity contract no longer is a plan investment alternative).

This presumes each annuity contract already states provisions that meet I.R.C. § 403(b).

3.    If done carefully, the result is that the individual holds the annuity contract, which is no longer the plan’s asset.

4.    Even without a rollover, a distribution of the annuity contract does not count in the individual’s income. Rather, the individual has income when she takes a distribution from her annuity contract.

The insurer might try some resistance. But there might be nothing the insurer can do to the employer if the employer never was a party to the individual annuity contracts.

See Internal Revenue Code of 1986 [26 U.S.C.]

§ 401(a)(38) allowing qualified distributions of a lifetime income investment, or of a lifetime income investment in the form of a qualified plan distribution annuity contract http://uscode.house.gov/view.xhtml?req=(title:26%20section:401%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section401)&f=treesort&edition=prelim&num=0&jumpTo=true

§ 402(c)(8) http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true

§ 403(b)(11)(D) allowing such a distribution without waiting for age 59½, severance, or hardship http://uscode.house.gov/view.xhtml?req=(title:26%20section:403%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section403)&f=treesort&edition=prelim&num=0&jumpTo=true

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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  • 2 weeks later...

You can also apply to the DOL for a determination of ERISA status and then present that to the insurance company.  I would also agree with @Carol V. Calhoun that a whole new plan is not necessary to redirect new monies to a different custodian; @Peter Gulia then notes some good options to get the insurance contracts cashed out.  If the fees and presumably the investment returns are sub-standard, the employer has a fiduciary responsibility to get the monies moved.  The insurance company can also try to defend its position against DOL complaints made by the affected participants for the same reasons.

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