A couple of easy (?) questions...

[Bird]

I've sort of fallen into handling a 403(b) plan; some questions came up and I'm looking for some guidance, since this is not really my area of expertise.

Client is unhappy with investments, and is considering amending their existing PS plan to a 401(k) and getting rid of the 403(b) (the 403(b) has a match if that makes a difference). My initial reaction was "why not just add a different investment choice?" and I'm not sure I got a good answer to that, but if anyone has any general comments on whether or not this is a sound idea I'd like to hear them.

If they decide to go ahead, is there anything special about terminating a 403(b)? Do you just say in a resolution that it's term'd and that's about the end of it? Or does the existence of the contracts mean that the plan goes on indefinitely, even if no new money is added?

Thanks for any feedback.

[mbozek]

There are more admin cost in 401k plan because it is requires a determination letter and periodic amendments as well as filing of full 5500 and ADP testing if HCEs participate. 401k plan permits exclusion of employees with less than 1 yr of service.

403b plans permit HCEs to contribute max salary reduction plus 3k for ees with more than 15 yrs of service w/out ADP testing. 5500 filing is minimal. Matching contributions are subject to ACP test. No formal requirements for termination other than board resolution and filing of final 5500 and SMM. If mutual fund is used for plan funding, assets need to be transferred to another b7 account or annuity.

Why does client think that changing to 401k will allow bettter investment options? Outside of allowing investments in individual securities through directed brokerage, the investment choices are not much different for NP.

[Bird]

Thanks for the comments; that's exactly what I was looking for - especially about the ADP testing, which I forgot to mention in my initial remarks when they first brought up the idea.

If mutual fund is used for plan funding, assets need to be transferred to another b7 account or annuity.

They're currently using annuities, so this isn't an issue, but out of curiousity, does this mean that someone has to track down each participant and force a transfer? What if someone refuses? Does the plan "exist" indefinitely in that scenario, for purposes of 5500 filing?

[mbozek]

Plans usually provide that amounts in b7 account will be transferrd to a 403b annuity where participant does not transfer the funds voluntarily in event of termination. Proposed 403b regs would permit tax free rollover to IRA upon plantermination.

[Bird]

Follow up question - the proposed regs say that distributions upon termination are permitted if the employer does not maintain another 403(b) plan in the 12 months before and after the termination.

Does that mean participants would have to wait 12 months after the termination before distributions are permitted (on further thought I don't know what else it could mean but I'll go ahead...) or can distributions occur immediately at risk of being disallowed (don't know how that would work)?