403(b) sponsor establishes 401(k)

[Guest PMiller]

As of 7/1/02, we are setting up a 401(k) plan for a company which currently sponsors a 403(B) plan. [There is no change in the status of the employer, only a desire to use a 401(k) vs. a 403(B) and a different investment company.] This (403(B)) plan includes an employer discretionary contribution and pre-tax deferrals. The employer would like to terminate the plan, but my understanding is that there is no basis for termination. Given that the 403(B) will continue to exist, it would appear that an amendment should be made to the 403(B) to take the contribution to 0%. With respect to the deferrals, the adoption agreement simply states that deferrals are limited to statutory levels [402(g) and 403(B)(2) are listed]. So, there is no way to modify the adoption agreement to discontinue deferrals. May deferrals be prohibited by including a paragraph in the resolution to amend the employer contribution, or must employees be permitted to make deferrals to the 403(B)? Thanks.

[mbozek]

The employer can adopt an amendment to the plan or pass a board resolution ceasing contributions to the 403(B) plan. The employer can avoid the 204(h) notice if the er contribution is made on a discretionary basis. But your post raises other issues: Why is the er terminating the 403(B) plan and adopting a k plan??? A 403(B) plan does not require approval by the IRS, has simplified annual reporting, has no testing of employee salary reduction contributions, e.g., every employee can put away up to $11,000 and provides and extra $3,000 catch up for employees with 15 years of service. The only advantage of a 401(k) plan is that employee can invest in individual investments such as stocks, bonds or limited partnerships while a 403(B) plan can only invest in mutal funds or annuities. Remember that the total employee contribution to the 401(k)/403(B) plan must be aggregated under 402(g). I dont know if the employee could contribute $11,000 under the 401(k) plan and the $3000 catch up under the 403(B) plan and comply with 402(g). But an HCE could contrib utue the maximum allowed udner the adp to the 401(k) and fill outa the remaining salray reduction under the 403(B) -plan The over 50 catch up coul be available under either plan.

[Ellie Lowder]

I agree with mjb. I am seeing many cases where a 501©(3) stopped contributions to a 403(B) plan, installed a 401(k); then encountered unhappy HCEs who were then limited on the 401(k) deferrals. Then, there's the administrative costs of filing a full-blown 5500 in the 401(k)with schedules/independent audit reports, etc. etc. In a 403(B), there are no schedules, no independent audit, and only 6 (or is it 7) simple questions to answer. Anyone can quickly do that form! There is also the need to continue to administer the "frozen" 403(b)in accordance with ERISA requirements. Those same employers are now terminating the 401(k) to once more offer the 403(B) plan and wishing "someone" had explained both the pros and cons. If you have explained the upsides and downsides of this action, and the employee still wants the 401(k)for the greater investment options, fine. But you do want to be sure that you have so done!