403b closing 401k startup same employer

[Sixers]

403b is terminating Sept. 2018 and starting 401k same year 2018.  Plan wants move away from universal eligibility for ED on 403b and add age 21 and 6 mth service.

- 403b is 001 so use 002 for 401k?

- use original effective date as 1/1/2018?

- rollover of loans allowed?  Does it need to be stated in AA or no?  

- does excluding vesting prior to effective date of the plan need to be addressed?

- any employee can in 403b plan rollover balance to 401k even if they would not be eligible to enter under 401k plan under new eligiblity rules? 

- employees years of service and vesting still can continue If all the participants chose to rollover to 401k plan?

- any other considerations on plan document creation or processing/logistics?   I appreciate your help!!!

[Patricia Neal Jensen]

1. Terminating a 403(b), although possible, is not easy.  I suggest reading  everything you can find on this subject before  you begin.   The biggest stumbling block is that all plan assets must be paid out within 12 months of the termination date or the termination will be retroactively disqualified (and you will have impermissible distributions by the 403(b)  either spent or rolled over by the accounts which did distribute).   Whether or not the plan sponsor can control asset distribution without participant consent is a material issue in these situations. You did not say how the 403(b) is invested, but individual annuity contracts would have to be distributed by the issuer and mutual funds, if this is a 403(b)(7), present another set of challenges.   If this process is done incorrectly or without regard to proper timing,  your client will have two ERISA plans and one will have made improper distributions in violation of the document and of the law.  www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans-terminating-a-403b-plan; www.plansponsor.com/properly-terminating-a-403b-plan/ 

And now your client has traded "no deferral testing" for "annual deferral testing" in order to get a 6 month eligibility.  Unless the census population makes this an audit or no audit situation, I think this plan of action  is  one the client will regret.

2. 401(k) will be 002

3. The 401(k) effective date would be whenever the plan can actually permit deferral contributions.  Not January 1, 2018.   The effective date of the 401(k) is not the "original effective date" of the 403(b).

4. The loan rollover issue is one which would be  addressed in the respective documents.  If the 403(b) plan document says that all loans are due and payable upon plan termination (which is what most would say), then they are due and payable, etc.  I have not researched this for technical/ legal issues but would believe that the respective plan documents can or must deal with this.

5. The issues surrounding vesting of the match or other employer contribution in the 401(k) will be addressed in the Adoption Agreement for the 401(k) (or equivalent document).  If service credit for vesting is to start with the 401(k) plan effective date, select the choices in the 401(k) document which say that.

6. Whether employees have to be otherwise eligible to make rollovers into the 401(k) is, again, a document issue.   Most documents require a choice to be made and one of the choices is "all employees regardless of eligibility."

7. As indicated above, years of service credit for vesting will be determined by the choices you make as you prepare the 401(k) document.  This issue is unrelated to whether or not an employee rolls over his or her 403(b) balance.  All assets in the 403(b) will be 100% vested when this 403(b) plan is terminated, but this is not indicative of the vesting of new employer contributions into the 401(k).

8. Among the other issues this project presents is the  PPA restatement of the 403(b) plan document.  Although not due until March of 2020, the  403(b) document the client is using now may  not have an IRS letter.  Prudence would indicate a document restatement prior to the plan termination so that the 403(b), if later challenged, would have an IRS letter.

9. I am assuming that you and your client understand that you could easily have the 6 month eligibility for employer contributions in the 403(b) plan.  Only the opportunity for employee deferrals has to be immediate.

I suggest making a list of all the steps which will have to be taken to do this and another list of all the " pluses and minuses"  and then sitting down and going over all of this carefully with your client.  Adding the testing of deferrals to the administrative burden for a plan is a significant step, and the actions which must be taken when and if testing fails are sometimes a shock to employers.  Unless this is the difference between an audited and an unaudited plan, I do not see what could be gained by this change which will make it worth all the work and the other hazards of its undertaking.