Freezing 403(b) Plan/amend MP to 401(k)

[Cathy from Chicago]

I know virtually nothing about 403(b) plans. The broker on this case called to say with the new 403(b) regs, he wants employer to freeze it (only 4-5 NHCE ee's contributing), thus avoiding to have 403(b) plan document. I have no idea if this is true or not.

Then - he wants us to amend/restate their exisiting Money Purchase plan to a 401(k) to allow the 4-5 employees now in the 403(b) to contribute to it. Only one HCE in the company and he has a 457 Plan (know nothing about those either). Can someone tell me if the broker's idea makes sense?

Thanks in advance for any assistance.

[John Feldt ERPA CPC QPA]

he wants employer to freeze it thus avoiding to have 403(b) plan document. I have no idea if this is true or not.

Two things:

1) a "plan document" isn't technically required by the final regulations, but a "written plan" is (yes, that may just be mincing words FWIW). Only the preamble to the Final 403(b) regulations uses the word "document". The written plan could just be a collection of the contracts, agreements, etc. as long as they cover/include all of the necessary items to satisfy the Final regulations.

2) I don't remember reading a section where a frozen 403(b) plan would not be required to comply starting in 2009 (but another commentator may help us there). Another option would be to adopt the Final Regulations now which allows you to terminate the 403(b) plan.

Then - he wants us to amend/restate their exisiting Money Purchase plan to a 401(k) to allow the 4-5 employees now in the 403(b) to contribute to it.

Wow, they still have a money purchase plan! Not many of those left around! The broker might be saying the money purchase plan could be merged into a 401(k) profit sharing plan, which isn't a bad idea, if it's really necessary for the employer to do that.

Only one HCE in the company and he has a 457 Plan (know nothing about those either).

We have a 457 forum here, you can ask specific question there. I'm guessing the employer in your case is a non-profit? A 457(b) plan for a nonprofit can only cover primarily upper management and highly compensated employees (top hat plan). One reason for that may be that the money "deferred" is not protected by a trust, it is still subject to creditors.

Now, why spend the money on a money purchase merge/restatement, instead of just adopting the Final 403(b) regulations for the 403(b) plan? If you go to a 401(k) plan, then you have to test average deferrals (ADP test, unless you adopt Safe Harbor provisions); whereas you have no ADP test on a 403(b) plan. Please find someone (other than the broker) who can give the employer the advice they need to have the best overall plan(s) for their specific circumstance.

[Cathy from Chicago]

Thanks, John, for making time to give me some answers. If they adopted the final 403(b) regs, as you suggest, and then terminated the plan, would those few participants be able to transfer their TSA funds in to the Money Purchase Plan (which allows for transfers/rollovers)?

Cathy

he wants employer to freeze it thus avoiding to have 403(b) plan document. I have no idea if this is true or not.

Two things:

1) a "plan document" isn't technically required by the final regulations, but a "written plan" is (yes, that may just be mincing words FWIW). Only the preamble to the Final 403(b) regulations uses the word "document". The written plan could just be a collection of the contracts, agreements, etc. as long as they cover/include all of the necessary items to satisfy the Final regulations.

2) I don't remember reading a section where a frozen 403(b) plan would not be required to comply starting in 2009 (but another commentator may help us there). Another option would be to adopt the Final Regulations now which allows you to terminate the 403(b) plan.

Then - he wants us to amend/restate their exisiting Money Purchase plan to a 401(k) to allow the 4-5 employees now in the 403(b) to contribute to it.

Wow, they still have a money purchase plan! Not many of those left around! The broker might be saying the money purchase plan could be merged into a 401(k) profit sharing plan, which isn't a bad idea, if it's really necessary for the employer to do that.

Only one HCE in the company and he has a 457 Plan (know nothing about those either).

We have a 457 forum here, you can ask specific question there. I'm guessing the employer in your case is a non-profit? A 457(b) plan for a nonprofit can only cover primarily upper management and highly compensated employees (top hat plan). One reason for that may be that the money "deferred" is not protected by a trust, it is still subject to creditors.

Now, why spend the money on a money purchase merge/restatement, instead of just adopting the Final 403(b) regulations for the 403(b) plan? If you go to a 401(k) plan, then you have to test average deferrals (ADP test, unless you adopt Safe Harbor provisions); whereas you have no ADP test on a 403(b) plan. Please find someone (other than the broker) who can give the employer the advice they need to have the best overall plan(s) for their specific circumstance.

[John Feldt ERPA CPC QPA]

Yes.

[QDROphile]

Not so sure about that. How do you get a distribution of the 403(b) amount for rollover to the qualified plan?

[joel]

Not so sure about that. How do you get a distribution of the 403(b) amount for rollover to the qualified plan?

Hi QDROphile:

Under the 403b regs Plan Termination is added as a distributable event. This will enable the employee to rollover the distribution to any other eligible plan including an IRA.

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

NYC

[John Feldt ERPA CPC QPA]

bingo!

[TLGeer]

Why would they prefer a 401(k) to a 403(b)? Absent a desire to avoid mutual funds or concern about availablity of hardship distributions, the 403(b) format is always preferable. The 403(b) can act as a 401(k)+, with no ADP testing and additional contribution limits. I spend a significant amount of my practice getting people out of the ADP test who didn't know they were getting into it, and you usually end up with two plans in a single master trust, because the termination-reestablishment rules for 403(b) and 401(k) are asymmetrical (i.e., you can terminate and roll over the 403(b), but not the 401(k)). The employer ought to stop and fully understand the consequences of the decision.

There is also a distinct possibility of losing the 457 if the 403(b) is properly planned out, in a manner parallel to the 3% safe harbor cross-tested 401(k), with potentially higher limitations to work within.

The broker is working with what he knows, and it looks like the answer he's coming up with may be wrong. Somebody should go back to square one with the employer.

Tom Geer