Converting 403(b) to a 401(k)?

[Guest RDS METRO]

I apologize in advance if my question seems elementary to the bulk of 403(b) experts that frequent this board! I am fumbling through my first 403(b) takeover!

My client has a 403(b) with deferrals and an Employer match of dollar for dollar up to 5%. I believe the Plan is exempt from ADP testing, but has a real tough time passsing 401(m).

Assuming the existing 403(b) Plan Document allows it, would it be a good idea to convert the Plan to a 401(k) Safe Harbor Plan, since their Employer Match is already satisfying the Safe Harbor guidelines? Also, since EGTRRA relaxed the rollover rules, there is no reason that I need to keep the 403(b) assets seperate, correct?

Any guidance would be greatly appreciated.

[Guest Bob K]

The dollar for dollar match up to the first 5% certainly would satisfy the level of contribution required for a Safe Harbor. Remember, however, that in order to be a Safe Harbor contribution the match would have to be 100% vested at all times and there can be no last day/1000 hour requirements on it. Better check with the Sponsor to see if these conditions might cause a problem.

Also, remember that you will have to satisfy the Notice requirement and amend the plan document. You can use the Safe Harbor in a 403(b). I don't see why you would want to change the type of plan.

Note: You cannot amend a 403(b) into a 401(k) plan. You can "freeze" the 403(b) and start up a 401(k) but you must maintain the 403(b) until all the assets are distributed.

"there is no reason to keep the 403(b) assets separate". EGTRRA allows the participants to roll the funds from a 403(b) to a 401(k) upon attaining a distributable event. The employer cannot transfer or merge all the 403(b) assets into the 401(k).

Hope this helps.

[Guest RDS METRO]

Thank you - That information is perfect. Makes sense to use the Safe Harbor within the 403(b). I was not aware that this was an option.

[Guest Pete Swisher]

Bob K,

I've had this issue come up several times and am wondering if you have a cite on inability to convert/merge 403 to 401 or vice versa. An attorney friend told me he knew of no cite, but that it seems a reasonable thing to do and matches the logic of EGTRRA (i.e., new portability at participant level, so why not at plan level), but not safe to try without ruling from IRS. We handled it the way you suggested--participants did rollovers. More paperwork by far but it worked out.

thanks

[Guest Bob K]

Pete:

This issue was addressed by the IRS at last year's ASPA meeting in DC in October. Question and Answer #31 states that this can only be done if the statute changes.

EGTRRA only changed the ability for the individual to rollover funds not for the Plan Sponsor to merge plans.

Hope this helps.

Bob