How can I get money from an employer's old 457(b) plan to the employer's new 457(b) plan?

We have an employer who wants to freeze their current 457(b) plan and start a new 457(b) plan.  The employer also wants to allow participants to roll their account balances from the current 457(b) plan into the new one.  The employer is tax exempt (not governmental) and the plan-to-plan transfer rules in 1.457-10(5) require that "the participant has had a severance from employment with the transferring employer and is performing services for the entity maintaining the receiving plan."  (Interestingly enough, there are specific rules for plan-to-plan transfers in a government 457(b) plan within the same employer).

This would seem to ruin our client's plans.  Is there any other way to get money from the current 457(b) plan into the new 457(b) plan?  

Also, does anyone know the reasoning behind allowing plan-to-plan transfers in tax-exempt employers only where there is a severance from employment?  It seems like with any other type of plan (government 457(b), 403(b), 401(a)), we'd be able to do this, but not here.

If the participant's right to deferred compensation is unfunded, wouldn't the "transfer" you mention be a participant exchanging his or her contract right to a payment from the employer for another contract right to a payment from the same employer?

Would it be simpler to amend the one plan to allow no more deferral?

Are you really changing/transferring plans? Or are you really just looking to change funding vehicles/recordkeeper/vendor? When a 401(k) plan moves from Fidelity to Vanguard you don't (or shouldn't) create a new plan and do a plan to plan transfer, what makes this situation any different?

I don't want to disclose too much detail, but, yes, we are starting a new plan.

Currently, the employer is running the plan.  We wanted to offer the participants more options in the plan but the employer is not able to run the more complicated plan, so we need a recordkeeper for the new options.  Unfortunately, there are a couple things about the existing plan that the recordkeeper cannot do, so we have to freeze the old plan and let the employer keep running it and start a new plan with the new recordkeeper running it.  

We'd like to offer participants in the old plan the option to transfer funds to the new plan (to take advantage of the new features), but the regs appear to prohibit that.

It makes me very nervous to just trade one unfunded benefit for another since the 457 regs do not appear to allow that.  If we don't follow the 457 regs, we won't be a 457(b) plan, and all the benefits will be taxable when vested (i.e. immediately) under 457(f).

The employer's changing the recordkeeper for its 457(b) program, or adding a second recordkeeper with different options, is not the establishment of another plan. The 414(l) regs, which are the basis for identifying separate plans of a single employer, rely on pools of assets held in trust and just don't work for technically "unfunded" arrangements like nongovernmental 457(b)'s.

A similar, but harder, issue arises in executive nonqualified deferred comp plans, e.g. when you have a spinoff of a division. The obligation to pay the deferred comp to the executives at that division is sometimes transferred to the new employer, and the purchase price for the division is correspondingly reduced by the present value of the deferred comp liability to compensate the acquirer for taking on the liability. Happens a lot and I've never seen it questioned or heard of IRS raising issues with this in an exam. Of course, if the executive has a choice to take cash instead, it won't work. But unless the executive can choose cash, he or she just has an unfunded, unsecured obligation to pay money in the future, both before and after the obligation is transferred, which under Section 83 is not "property." There can be no taxable "exchange" under Section 1001 without "property."

In your case, it's even easier because the identity of the employer is not changing. This is similar to if you changed the vendor for your 401(k) from one company to another, and restated your plan document. You might have different investment options, better internet access, a phone app, and other plan improvements that would make it look like you had a new plan, and from an HR standpoint you might think of it that way, but you would still keep the same plan # for your 5500, because it's still the same plan.