403(b) as "successor" to terminating 401(k) plan

[Guest APierce]

A client wishes to terminate its 401(k) plan and make distributions. However, the client also permits employees to defer income to annuity contracts through a non-ERISA 403(b) arrangement. My concern is that the 403(b) arrangement might be considered a successor plan under 1.401(k)-1(d)(3) - a defined contribution plan maintained by the same employer. I'd like to argue that it is not a successor plan as it is not a plan maintained by the employer (at least for ERISA purposes). Clearly, for 415 purposes, the employee is generally deemed to maintain the annuity contract, not the employer.

Interestingly, the proposed 401(k) regulations add 403(b) plans and contracts to the list of plans, which currently includes ESOPs and SEPs, not considered to be successor plans. The preamble does not specify whether this is a change in position or simply a clarificiation of the existing rule.

Anyone have any thoughts on whether a non-ERISA 403(b) program should be considered a successor plan under the existing guidance?

[Blinky the 3-eyed Fish]

My recollection is that 403(b) plans were unofficially not considered successor plans, although it was a point of debate. From your reading of the new regs, it appears that it has been clarified now that they are definitely not successor plans.

[mbozek]

I thought that non qualified plans were not considered to be successor plans which is confirmed by the proposed regs.

[Blinky the 3-eyed Fish]

Isn't that what I said?

[Guest APierce]

Thanks for your replies.

Before I checked the regs, my recollection was the same -- that only qualified plans were considered successor plans. However, the current regulation does not necessarily limit successor plans to qualified plans, and I have not been able to find any current guidance, formal or informal, one way or the other. Of course the proposed regs certainly indicate that the IRS now thinks that 403(b)s should not be successor plans. But those are proposed regs upon which we have no reliance.

I've got a call into the drafters of the proposed regs. I'll let you know if I get any helpful guidance.

Thanks again.

[mbozek]

A the time the 401(k) regs were last revised in 1994, non profit employers were not permitted to adopt a 401(k) plan. The proposed regs reflect the 1996 change in the law which permits a non profit employer to establish a 401(k) plan as well as a 457(b) plan in addition to a 403(b) plan or a SIMPLE IRA, none of which was permitted when the regs were last revised.

[Guest APierce]

That's a great point. I had not thought of it that way. Thanks.