terminating a 403(b) Plan

[Santo Gold]

An employer has 2 "old" 403(b) plans. Both plans have around 60 participants with account balances but no new contributions have been made into the plan for years. I believe it was frozen to not allow new participants/deposits about 5+ years ago.

The same employer sponsors a new 403(b) plan with different investments. I believe all employees are eligible to participate in this new plan.

Can the employer terminate the two old plans and allow the participants to either (1) roll their balances into the new plan (2) take their account as a cash distribution, or (3) leave their account where it is but turn it into an IRA.

Alternatively, can the ER merge these 2 old plans into the new plan, moving all the old money into the new plan without participant consent?

Thanks

[ETA Consulting LLC]

An employer has 2 "old" 403(b) plans. Both plans have around 60 participants with account balances but no new contributions have been made into the plan for years. I believe it was frozen to not allow new participants/deposits about 5+ years ago.

The IRS has rules regarding which 403(b) accounts "must" be included as part of the plan for compliance purposes. These are different from the DOL's rules on which participant accounts must be included on a Form 5500; where transition relief is a big factor when there aren't any additional deferrals being made to the contracts after 2008.

The same employer sponsors a new 403(b) plan with different investments. I believe all employees are eligible to participate in this new plan.

Of course they are, given there are few exceptions to the universal availability rules on deferrals.

Can the employer terminate the two old plans and allow the participants to either (1) roll their balances into the new plan (2) take their account as a cash distribution, or (3) leave their account where it is but turn it into an IRA.

Not now. A 'termination' is followed by a full distribution of assets within 12 months. 403(b) plans have historically had problems terminating because of this provision. Also, there is still some back and forth on distributing the accounts for several brokerage accounts under 403(b)(7) where the IRS rules allowing the employer to distribute the contract isn't necessarily supported by the state laws governing the brokerage accounts. I am not sure where this has evolved, but it appears to be a non-issue since the plan is not terminated.

Alternatively, can the ER merge these 2 old plans into the new plan, moving all the old money into the new plan without participant consent?

You're not going to move a participant's contract to a new provider without the participant's consent. Remember, the IRS has rules on which plans must be considered as part of the plan for compliance purposes. These contracts will likely continue as part of the new plan and will not move until the particpiant actually makes an election.

Good Luck!

[Santo Gold]

An employer has 2 "old" 403(b) plans. Both plans have around 60 participants with account balances but no new contributions have been made into the plan for years. I believe it was frozen to not allow new participants/deposits about 5+ years ago.

The IRS has rules regarding which 403(b) accounts "must" be included as part of the plan for compliance purposes. These are different from the DOL's rules on which participant accounts must be included on a Form 5500; where transition relief is a big factor when there aren't any additional deferrals being made to the contracts after 2008.

The same employer sponsors a new 403(b) plan with different investments. I believe all employees are eligible to participate in this new plan.

Of course they are, given there are few exceptions to the universal availability rules on deferrals.

Can the employer terminate the two old plans and allow the participants to either (1) roll their balances into the new plan (2) take their account as a cash distribution, or (3) leave their account where it is but turn it into an IRA.

Not now. A 'termination' is followed by a full distribution of assets within 12 months. 403(b) plans have historically had problems terminating because of this provision. Also, there is still some back and forth on distributing the accounts for several brokerage accounts under 403(b)(7) where the IRS rules allowing the employer to distribute the contract isn't necessarily supported by the state laws governing the brokerage accounts. I am not sure where this has evolved, but it appears to be a non-issue since the plan is not terminated.

Alternatively, can the ER merge these 2 old plans into the new plan, moving all the old money into the new plan without participant consent?

You're not going to move a participant's contract to a new provider without the participant's consent. Remember, the IRS has rules on which plans must be considered as part of the plan for compliance purposes. These contracts will likely continue as part of the new plan and will not move until the particpiant actually makes an election.

Good Luck!

Thank you for the in-depth reply. Unfortunately, it appears that they do not have much in the way of options. They cannot terminate the old plans and they cannot merge the old ones into the new one. Is there no way to get rid of a 403(b) plan?

The assets are held with a large insurance/investment provider. One of their reps was suggesting having the assets converted into paid up annuities, which (somehow) would be beneficial. Do you know anything about why this would/would not work?

Thanks

[ETA Consulting LLC]

The assets are held with a large insurance/investment provider. One of their reps was suggesting having the assets converted into paid up annuities, which (somehow) would be beneficial. Do you know anything about why this would/would not work?

Thanks

Actually, a plan consisting of only 403(b)(1) insurance annuity contracts could easily terminated in this manner; making a full distribution of all assets within 12 months by issuing these contracts. The 403(b)(7) brokerage accounts would run into problems with certain state laws.

I think the issue, currently, is that they have started another 403(b) plan; which appears nothing more than a continuation of the current plan given the IRS's required enforcement of contracts after 2005. (The 2005 date is loosely stated. I didn't look up the actual reference, but it was around that time.)

Good Luck!