May a non-profit terminate a 403b and start a 401k plan in the same year?

[wcj99]

May a non-profit terminate an 403b and start a 401k plan in the same year?

[ETA Consulting LLC]

Sure, but why?

Good Luck!

[wcj99]

Why? Apparently as a last resort.

Organization is a 501©(3) that has 110 employees and has fairly high turnover. Without an effective mechanism to exclude employees from eligibility they have been forced to do costly financial audits as part of the 5500 reporting process. If they terminated the 403b at the end of 2013 and start a 401k with a 12 month eligilibility on 1/1/2014 you could have the following scenario.

2013 - 1/1 start with 110 employees,with 40% turnover. Currently all are eligible but only 40 participate. Audit would be required. Terminate plan on 12/31.

2014 - 1/1 adopt 401k and start with 110 employees. Adopt 12 month eligibility provision. All employees on 1/1 would be eligible, but due to attrition and new eligibility requirerments only 65 would be eligible as of 12/31.

2015 - With only 65 eligible on 1/1 no audit would be required.

Thoughts?

[ETA Consulting LLC]

Thats a good reason. I assume the employer does not have "limited involvement" in the contracts (either making employer contributions to the plan or some other form of involvement making the 403(b) suject to ERISA). In such event, your approach makes perfect sense.

Good Luck!

[Flyboyjohn]

While avoiding a plan audit by doing away with universal avaialability is the "best" reason to switch to a 401k there are many other good reasons to switch.

In fact, I would argue there's no good reason for an ERISA 403b to stay 403b and would be happy to send anyone who wants to debate the issue a piece I've written entitled "The Case for Abandoning 403b in Favor of 401k"

[frizzyguy]

While avoiding a plan audit by doing away with universal avaialability is the "best" reason to switch to a 401k there are many other good reasons to switch.

In fact, I would argue there's no good reason for an ERISA 403b to stay 403b and would be happy to send anyone who wants to debate the issue a piece I've written entitled "The Case for Abandoning 403b in Favor of 401k"

I would really like to see the piece you've written, sounds very interesting. That being said, can the plan be rolled over to the new plan? How does the logistics of that work?

[PensionPro]

Participants may rollover their balances into the 401(k) plan, the employer may not transfer the balances or merge the plans.

[Belgarath]

Flyboy - what about an employer who wants to maintain both? Wouldn't that be a good reason to keep the 403(b)? Granted that I don't think this is necessarily all that common, a hospital, for example, comes to mind. It's a way around normal 415 limits. (as an editorial observation, I've never understood the reasoning behind not aggregating the employer contributions in these cases, but that's another issue)

[Carol V. Calhoun]

While avoiding a plan audit by doing away with universal avaialability is the "best" reason to switch to a 401k there are many other good reasons to switch.

In fact, I would argue there's no good reason for an ERISA 403b to stay 403b and would be happy to send anyone who wants to debate the issue a piece I've written entitled "The Case for Abandoning 403b in Favor of 401k"

I assume you're referring to 403(b)s in the private sector? A public school is pretty much stuck with 403(b) or 457(b), unless there is a grandfathered 401(k).