Is it possible to transfer between employer's 2 plans

[pam@bbm]

Employer has 2 plans, one for union employees and the other for administration. A participant in the union plan changes positions and is no longer eligible for that plan. How can he transfer his funds to the other plan. Can it be done through an in-service withdrawal from the union plan and rollover to the other plan? He is 50 years old.

[QDROphile]

For defined contribution plans, plan-to-plan transfers often work well, but have implications that should be understood before undertaking them. Both plan documents must have appropriate provisions for the transfers.

In-service distribution and direct rollover work if in-service distribution is allowed. The participant has to elect the distribution. Your post implies that the employee wishes to move everything to the other plan.

[david rigby]

Likely, this question has been answered (in the negative) sometime in the past when another EE changed positions. QDROphile is correct.

[Doghouse]

I have facilitated this type of transfer several times. The ERISA Outline book has a lovely discussion about it in Chapter 6, Section III, Part D, 3.c.

[AndrewZ]

Related to this, we have a potential client who has separate plans for the statutorily-excludable employees, and the non-excludable employees (who are eligible for SH Match). They automatically process involuntary transfers to the 2nd plan for all employees who shift eligibility. I originally couldn't imagine that the IRS intended transfers for anything besides spin-offs or mergers, but Reg. 1.411(d)-4 Q&A 3 (which is what the ERISA Outline book section Doghouse references covers) provides an exception to preserving 411(d)(6) protected benefits in the case of voluntary transfers between plans in exactly such a situation. This seems to imply that the arrangement with the involuntary transfers is OK (assuming protected benefits are preserved)?

Of course, I think we would recommend instead that they have a single plan with a year-of-service requirement for SH matching contributions (aware that ADP/ACP testing and TH minimums applies to the excludable employees) - the current arrangement is overly complex and expensive.

[QDROphile]

What makes the arrangement overly complex and expensive? And can you quantify the expense to provide a frame of reference?

[Doghouse]

I, for one, do not believe an involuntary transfer is permissible.

[AndrewZ]

QDROphile, there's the duplicate annual administration fees, duplicate recordkeeping fees and possibly less leverage for lowest investment fees, and administrative burden of tracking when participants complete one year of service and then processing the transfers between the plans. It's also caused a problem because they have to report the participant as "terminated" with the recordkeeper in order to transfer to the other, resulting in a termination notification being sent by the recordkeeper.

If the plans covered completely different groups of employees, or had different provisions such as vesting, separate plans would make more sense. But it seems pretty simple to accomplish what they want in a single plan. However, they don't want to make changes at this time, and want to know that we will administer it the way it's currently designed.

[AndrewZ]

I, for one, do not believe an involuntary transfer is permissible.

Doghouse, may I ask what your reasoning is? What would prohibit it? (I can't find anything that explicitly allows it, but nor prohibiting it.) Thanks.

[K2retire]

What is the distributable event?

[AndrewZ]

What is the distributable event?

That was our first reaction, but it's being treated as a plan-to-plan transfer (like a plan merger or spinoff) -- not a rollover distribution.

[QDROphile]

Andrew Z:

I was focused only on the transfer part itself. I agree that there is little reason to maintain two plans under the circumstances. There is some odd trick to disaggregation that I have forgotten, but it does not matter in most situations. Mandatory transfer is permitted, and the transfer itself is not a big deal. I would have words with the recordkeeper.

[AndrewZ]

Thanks, QDROphile - that's the conclusion we've come to. Although it seems that the plan documents should clearly address this (the current ones don't), and to add such language to our VS document would take it out of pre-approved status.

I still consider it a gray area, as the regs don't seem to expressly allow it, and there's not a merger or spinoff that would inherently require transfers. But the regs don't prohibit it, and the participants' benefits aren't affected by it (unless perhaps the 2nd plan had higher investment-related fees).

[QDROphile]

I do not think it is a grey area. I have had the IRS rule on it indirectly. I was not asking about the issue because I took that element for granted. So did the IRS. The transaction is no different from any other spinoff/merger except that plan terms automate it rather than treat it transaction by transaction.