403(b) to an IRA. Can it be done

[Guest ButchElfers]

A hospital recently changed from a 403(b) to a 401(k). The employee (who is still employed by the hospital) would like to change investment providers. Since the 403(b) is not the current plan, Can he rollover the account to an IRA? I believe the answer is yes, however, the rollover form does not allow for a rollover to an IRA. Only a 90-24 transfer to another 403(b). Please Advise.

[jevd]

You need a distribution event. Change of plans does not constitute a distribution event. See previous posts on this issue. If a distribution event occurs then a rollover to an IRA is allowable. See IRS PUB 571 & 590

[mbozek]

Can you explain the reason for switching other than that the hospital is no longer a c3 employer since it now will incur the expenses of maintaining a qualfied plan? In addition the deferrals for the HCEs of the hospital are limited to the ADP % instead of the max 402(g) deferral of 19k (13+ two 3k catch ups). Or will the hospital maintain the 403(b) for HCE contributions which exceed the ADP %?

[Guest ButchElfers]

not sure why they changed plans from 403b to 401k. Good question.

[Guest richardl]

One of the main reasons to switch from a 403(b) to a 401(k) is for the benefit of the employees. It is more costly to the employer but investment performance to employees is significantly enhanced due to lower fees, especially in annuity based 403(b) plans.

It's a goor morale boost to the employees if the benefits of the change are properly explained. Although, if the object is to get as much to the HCE than stick with the 403(b).

[mbozek]

I dont understand your statement that a 401k plan benefits employees through lower costs since an employer can use custodial accounts from low cost providers such a Vanguard as 403(b) investments and there are 403(b) annuity providers such as TIAA-CREF whose costs are lower than most mutual funds. From what I have been reading, small employers overpay for mutual funds in 401k plans because of 12b-1 fees which pay for bundled services. The cost of the fund fees paid by employees is not dependent on the type of plan adopted by the employer but by the choice of investments used to fund the plan. Also employers can pass along most of the higher admin charges (5500, ADP testing, plan amendments & IRS approval) for running a 401k plan to the participants and most do. It makes no sense to pay for ADP testing as a plan cost when the a 403(b) plan is not subject to such a test.