Plan Mergers

[Madison71]

Good morning. I work with a plan sponsor whose consultant has recommended merging a 403(b) Plan into a money purchase plan to save money on having two plans and also on audit costs. At first blush, I thought a 403(b) Plan could not be merged into a money purchase plan because it is a 401(a) Plan. In addition, I believe the 403(b) Plan is operating as non-ERISA plan not subject to audit or filing requirements, so I am not sure there is money to be saved on audit costs. The consultant said they have merged many 403(b) Plans into 401(a) Plans. Any thoughts would be greatly appreciated.

[My 2 cents]

Good morning. I work with a plan sponsor whose consultant has recommended merging a 403(b) Plan into a money purchase plan to save money on having two plans and also on audit costs. At first blush, I thought a 403(b) Plan could not be merged into a money purchase plan because it is a 401(a) Plan. In addition, I believe the 403(b) Plan is operating as non-ERISA plan not subject to audit or filing requirements, so I am not sure there is money to be saved on audit costs. The consultant said they have merged many 403(b) Plans into 401(a) Plans. Any thoughts would be greatly appreciated.

Given that I don't personally know whether one can merge a 403(b) plan into a 401(a) plan (can one?), but I wish to point out that the consultant saying that they have merged many 403(b) plans into 401(a) plans should, by itself, give only cold comfort. If it is not permitted, that just means that the consultant has been getting it wrong over and over and over again!

[david rigby]

Isn't it well-known that a 403(b) plan cannot be merged into a 401(a) plan, or vice versa?

Perhaps it is appropriate to use air-quotes: "consultant".

Perhaps there are some fees available for cleaning up the other mergers referenced in the original post?

[jpod]

Mergers of 401(a)s and 403(b)s cannot be done, having nothing to do with ERISA.

[Madison71]

Thank you! Thank you! That is what I responded with on the conference call last week, but they were so convincing that I need to check with the experts. If anyone reads this and thinks otherwise on a 403(b)/401(a) merger, please let respond.

[QDROphile]

Please identify the arrogant and ignorant consultant. This is appropriate for public shaming.

[Belgarath]

While I doubt that this is the case here, sometimes when someone says "merge" the plans they REALLY mean "terminate" and let the participants roll over the money if they wish. It might be worth double checking.

[QDROphile]

Still worth shaming. The misuse of terminology creates a quantitatively and qualitatively different impression and an appropriate impression of what is involved is important from the very beginning of contemplation of the action.

[jpod]

I agree 100% with that observation about the term "merger" often being used loosely. However, the advice here was to "merge" the 403(b) into the 401(a) (rather than vice versa), and a so-called "termination" of a 403(b) is usually not a distributable event.

[Belgarath]

I respectfully disagree. (I'm assuming the termination is done right...)

First, 1.403(b)-10(a)(1) specifically allows for a termination and distribution. Also, for a non-official source, please see following from IRS website.

IRC 403(b) Tax-Sheltered Annuity Plans – Terminating a 403(b) Plan

If allowed by the terms of the plan, a 403(b) plan sponsor (employer) may terminate the plan and distribute accumulated benefits to the participants and beneficiaries on termination.

To terminate a 403(b) plan, the plan sponsor must take the following steps:
•Adopt a binding resolution: ◦establishing a plan termination date,
◦ceasing plan contributions,
◦fully vesting all benefits on the termination date, and
◦authorizing the distribution of all benefits as soon as administratively practicable after the termination date;



•Generally, stop contributions by the sponsor or any related entity to any other 403(b) plan during the period that begins on the termination date and ends 12 months after all benefits have been distributed from the terminated plan (this requirement may be disregarded if at all times during the period beginning 12 months before the termination and ending 12 months after all benefits have been distributed, fewer than 2% of the employees who were eligible to participate in the terminated plan are eligible to participate in another 403(b) plan of the sponsor);


•Notify all plan participants and beneficiaries about the plan’s termination;


•Provide a 402(f) rollover notice to participants and beneficiaries; and


•Distribute all plan assets within 12 months of the plan’s termination date to participants and beneficiaries in accordance with Rev. Rul. 2011-7.

403(b) plans subject to ERISA may have to comply with additional requirements.

Additional Resources
Find recent guidance, frequently asked questions, forms and publications, mini-courses and other 403(b) resources.

[Madison71]

Thank you to all. I did say multiple times "do you mean terminate the plan" or merge the plan?" I was told repeatedly merge the plans. Consultant definitely understood the difference. I even asked do you mean one provider contract and two plans or actually merging the plans?

[FormsRstillmylife]

But if I said add an employer contribution provision to the 403(b) that is subject to 401(a) and bring the whole plan under the ERISA requirements, that is pretty standard to the industry.

[Madison71]

A couple questions to Belgarath on his comment above (and others please feel free to comment as well).

1. Can you terminate a 403(b) Plan and distribute assets out of the plan to participants and immediately establish a 401(k) Plan without violating any rules?

2. Can you terminate both the 403(b) plan and money purchase plan and distribute the assets out of the plan and THEN immediately establishing a new 401(a) plan allowing for 401(k) deferrals and discretionary employer contributions without violating any rules (thinking of successor plan rules in this instance...which I don't think is this case).

Thanks in advance!

[Belgarath]

1. Yes.

2. Yes, but you'd typically (in my experience) just amend and restate the MP plan to a 401(k) - usually cheaper and easier than terminating it.

[Madison71]

...Thanks Belgarath! Quick response on #2 - the MP plan is currently audited because in excess of 120 participants solely because there are a large number of former employees with account balances. My thinking is by terminating the Plan and establishing a new one would eliminate the cost for audits on the new plan because under 120.

[Belgarath]

Makes sense. That's why I said "usually." I should also warn you in advance that depending upon the funding company(ies) involved, getting distributions done for the 403(b) plan termination can be challenging.

[Madison71]

Thanks again and another great point.

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