Universal Availability - pseudo plan termination?

[Guest wiltony]

Non-ERISA 403b plan wants to terminate plan by prohibiting new participants but allowing existing participants to continue to contribute, thus letting the plan slowly phase out through attrition. Employer will instead participate in the State's 401k/457 Defined Contribution plans and direct any new participants there.

Will this violate Universal Availability because the 403(b) plan must still must exist for those old participants but is not available to any new participants?

[Carol V. Calhoun]

An employer can exclude from salary reductions under its 403(b) plan employees who are eligible to make contributions under the employer's 401(k) plan. §1.403(b)-5(b)(4)(ii)(B). Thus, if all employees can participate in either the 403(b) plan or the 401(k) plan, you shouldn't have a problem.

The only issue I would see would be if the 401(k) provided for exclusion of some employees who were ineligible for the 403(b), but did not fall within one of the permissible exceptions to the 403(b) universal availability rule.

[Guest wiltony]

Thank you Carol! I'm slightly concerned because the 401k plan they wish to direct participants to is a state-wide plan in which the employer (a school district) simply participates; it is not their own 401k plan. Do you think they might run afoul of this provision because of this detail, or does the language not make such a distinction, as long as the 401k plan is available to participants at all (whether or not the employers own plan)?

I was just reading the language, and it indeed does say "Employees who are eligible to make a cash or deferred election (as defined at §1.401(k)-1(a)(3)) under a section 401(k) plan of the employer."

Yikes!

[Carol V. Calhoun]

This actually comes up a lot, and while I don't have a citation off the top of my head, my understanding is that a plan is considered "of the employer" if the employer contributes to it (via salary reductions or otherwise), even if the plan is administered at the statewide level. Certainly, this was the approach the IRS took years ago when we asked about maximum contributions to a 403(b) plan (back before the repeal of section 415(e)), and the IRS required us to take into account the employer's contributions to a statewide DB plan.

[Guest wiltony]

Excellent, thank you once again Carol. Any suggestions on plan document language to exclude employees who are eligible to participate in the 401(k) (which is everyone) under this clause, while still including those current participants that we're grandfathering in?

[Guest wiltony]

One additional question to the plan language question just above:

Is there any way this action will enable a distributable event to allow existing participants to rollover funds, if desired?

[joel]

Formal termination of the 403(b) plan is required. Termination is the distributable event that will allow the participant, regardless of age, to effectuate a Direct Rollover to the Statewide Plan. In the absence of a formal termination of the 403(b) plan an individual needs to satisfy one of the triggering events listed under 403(b)7 and or 403(b) 11.

Joel

[Guest wiltony]

I was afraid of that, but as I suspected. Thank you Joel!

[Guest wiltony]

Just as another follow-up, I've come across Treasury Regulation 1.403(b)-10(a) which expressly permits what I'm trying to do!

From: http://www.irs.gov/pub/irs-tege/td9340.pdf#page=112

§1.403(b)-10 Miscellaneous provisions
(a) Plan terminations and frozen plans--(1)In general. An employer is permitted to amend its section 403(b) plan to eliminate future contributions for existing participants or to limit participation to existing participants and employees (to the extent consistent with §1.403(b)-5).