Termination of 403b - Can employees rollover to another 403b?

[KaJay]

We have an employer with 100% of employees in its 403b plan that is considering terminating the 403b plan in order to accomplish two things:

1. Start up with a new 403b

2. Provide access to cash for one of the employees

My understanding is that a termination results in a distributable event for employees, where they can either get the cash or rollover to another institution.

If a rollover to another 403b is possible, don't the regulations state that the employer cannot participate in another 403b for 12 months starting the date the funds are liquidated due to termination?

Meaning the funds that make it to the new 403b institution will need to just "sit there" for a year and employees will lose out on contributions that would have otherwise been sent to the initial 403(b). Is my understanding correct? 

 

[Belgarath]

Hi KayJay - yes, the successor plan rules apply if the employer terminates 403(b) and establishes a new 403(b). See 1.403(b)(10)(a)(1).

[CuseFan]

Otherwise the original plan termination is not a distributable event.

[KaJay]

Would the account termination also require liquidation of former employees who still have money in the plan? 

 

[Patricia Neal Jensen]

The two "goals" listed are precisely what the successor plan rules are meant to prohibit.   The money in the plan also has to be distributed within 12 months or the termination is retroactively negated.   This would also mean that all distributions from the original "termination" would not have been from a distributable event.  And if the existing 403(b) is an ERISA 403(b), they still have a 5500 and all other ERISA administration rules to follow with both plans.

Here is an idea:  Start a new 401(k) and terminate the 403(b).  The successor plan rules do not apply in a 403(b) to 401(k) sequence.  The sponsor will have deferral testing in the 401(k) and they still have to get all the money out of the 403(b) in 12 months, but it gives you something to offer them that may help.  Treas. Reg. Sec. 1.403(b)-10(a)(1);  PlanSponsor.com/Terminating-403b-starting-401k/

 

[Belgarath]

 

On 8/1/2023 at 1:54 PM, KaJay said:

2. Provide access to cash for one of the employees

Not knowing the situation, all this seems like a lot of time and expense just to allow one participant to get access to funds. Is there a loan provision? Hardship withdrawal provision? Employer contributions where the plan could be amended to allow in-service distributions of employer contributions at earlier ages?