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Can a plan sponsor merge 401(k) and 403(b) plans?

“I have at least one of my plan sponsor clients who has both a 401(k) plan and a 403(b) plan. Could my client merge the two plans in order to consolidate the assets?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in New York is representative of a common inquiry involving the merging of retirement plans.

Highlights of Discussion

  • Save for two exceptions, no, your client cannot merge 403(b) assets with an unlike plan (e.g., a profit sharing, 401(k), 457(b) plan, etc.) without causing the 403(b) assets to become taxable to the participants. Such a transfer could also jeopardize the tax-qualified status of the 401(k) plan.
  • 403(b) plan assets may only be transferred to another 403(b) plan. Further, the final 403(b) regulations are clear that neither a qualified plan nor a governmental 457(b) plan may transfer assets to a 403(b) plan, and a 403(b) plan may not accept such a transfer (see Treasury Regulation Section 1.403(b)-10 and Revenue Ruling 2011-07).
  • The two exceptions noted previously are plan-to-plan transfers by participants to governmental defined benefit plans in order to 1) purchase permissive service credits; or to make a repayment of a cash out.
  • This does not preclude a 403(b) or 401(k) participant with a distribution triggering event (such as plan termination) to distribute and complete a rollover to another eligible plan [e.g., a 401(k) or 403(b) plan] that accepts such amounts.

Conclusion

While there are similarities between a 401(k) plan and 403(b), the IRS treats them as unlike plans and, therefore, incompatible, for the purpose of plan-to-plan transfers or mergers. Participant rollovers, on the other hand, are potentially possible between the two.

 

 

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Nonprofit with 401(k) and 403(b)

Can a 403(b) plan merge with a 401(k) plan?

“I have a tax-exempt client that currently offers a 401(k) plan. The group is taking over another IRC Sec. 501(c)(3) tax-exempt entity that has a 403(b) plan.  Can the acquiring entity merge the 403(b) plan into the 401(k) plan?”  

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • No, generally the IRS does not allow mergers or transfers of assets between 403(b) and 401(k) plans [Treasury Regulation 1.403(b)-10(b)(1)(i)]. The IRS has stated in private letter rulings (PLRs) that if a 403(b) plan is merged with a plan that is qualified under IRC Sec. 401(a), the assets of the 403(b) plan will be taxable to the employees PLR 200317022.
  • One option would be to terminate the 403(b) plan, which would allow its participants to receive distributions (See the IRS’ Terminating a 403(b) Plan for more information).
  • The participants in the terminated 403(b) plan who receive eligible rollover distributions from the 403(b) plan would have the option to roll the amounts to the 401(k), provided the 401(k) plan permits rollover contributions (Revenue Ruling 2011-7 and IRS Rollover Chart.)

Conclusion

IRC Sec. 501(c)(3) tax-exempt entities have the ability to maintain both 401(k) and 403(b) plans independently. The IRS does not allow a sponsor to merge the two plan types, however.   A plan termination followed by participant rollovers may be a viable alternative to merging the plans.

 

 

 

 

 

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