Can a company offering a 403(b) also sponsor a 401(k)?

[Guest WyrickL]

Company is 501-3© and they currently sponsor a 403(B) for their employees. They just acquired a division that is asking if they (the division) can start their own 401(k). First can this company sponsor a 401(k) and 403(B)? And if yes, won't it have to be open to all employees of the company not just that one division?

[mbozek]

While a np employer may maintain a 401(k) plan for a seperate group of employees there is a fundimental question of why would an np do so. A 401(k) plan requires qualfication by the IRS, is subject to complex testing and administration rules, annual reporting, frequent amendment and approval of amendments by the IRS, and can be disqualfied for the failure to be operated in accordance with its terms. All of the above factors increase the cost of the plan either to the employer or the employees. A 403(B) plan is not submitted for approval by IRS, has simplified annual reporting, does not have any testing for employee salary reduction contributions, permits a maximum pre tax contribution of $15,000 for certain employees, is not required to be operated in accordance with its terms, cannot be disqualifed for the failure to be amended for changes in the law and does not have a trustee to administer the assets. A 403(B) plan which is limited to salary reduction can be exempt from all the requirements of ERISA. The only differences between the plans is that employees can invest in individual stocks and bonds in a 401(k) plan and a 403(B) plan must permit salary deferrals for all employees who work at least 20 hours a week and are not students exempt from FICA tax. The salary deferral attributable to a 401(k) plan counts toward the maximum deferral in a 403(B) plan. Both 401(k) and 403(B) plans are subject to ACP testing of employer contributions and the nondiscrimination rules for non matching contributions. However a 403(B) plan cannot be disqualified for the failure to comply with the nondiscriminaton rules because it is not a qualified plan. The contributions for the year in which discrimination occurs is included as income of the employee. The NP should consider a 457(B) plan for a select group of management which would permit deferral of up to $11,000 above the amount contributed to a 403(B) plan.

[Guest WyrickL]

Thanks for the information. I just have one more question, if a the does still decide they want to do this how would they go about excluding the other divisions? Would they be at risk for failing coverage, because I would think that the other employees from the other divisions since they are employees of the company, would have to be included in coverage testing.

[mbozek]

The 401(k) plan could be limited to employees of the division. Under reg 1.401(k)-1(B) the group of eligible employees and employees benefiting under the plan must meet the 410(B) ratio % test. However, in a 401(k) plan all employees who are eligible to make contributions are treated as benefitting for the purpose of the 410(B) test. If there are 50 employees in the division who meet the age and service requirements for a 401(k) plan then the plan has 100% participation. See the instructins for the 5300 form

[Guest Mike Schwing]

I have a similar situation. The employer is small and currently has a 403(B) and wants to adopt a 401(k). Can an employee participate in both the 401(k) and 403(B) at the same time?

We as a rule don't record keep 403(B)'s so I don't know a lot about them. If the ER goes ahead and adopts the 401(k) what options do they have with the 403(B)? Can they terminate it or is there a problem with the successor plan rule? Can you merge a 403(B) into a new 401(k) now? Can they just freeze the 403(B)?

[mbozek]

An employee can participate in both a 403(B) and 401(k) plan but the max deferral is 11k or 12 k if over 50. Since a 403(B) plan has no assets there is no formal termination procedure. All the assets are held in annuities or mutual funds owned by the participants. The er usually will adopt a resolution terminating the plan and file a final 5500 for the plan. Assets cannot be transferred to a qualified plan on account of the termination of the 403(B) plan. In effect terminating the plan is freezing the plan.