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403b plan
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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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retirement plan
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Time to Deal with Mergers

Time for Managing a Plan Merger

“My client is working through a business acquisition, which will involve merging two 401(k) plans.  He is concerned about how quickly they will be able to merge the plans.  Are there guidelines on compliance testing for the plans during the merger process?”

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

  • A special “transition rule” under Internal Revenue Code Section (IRC §) 410(b)(6)(C) applies for meeting employee coverage requirements in situations where an acquisition involves the merging of two plans. Under these rules, the plan will continue to be considered in compliance with minimum coverage requirements during a “transition period.”
  • The transition period is the period that begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction.  For example, for an acquisition that takes place on September 1, 2017, the transition period that would apply for a calendar year plan would last until December 31, 2018.
  • The transition rule is only available if 1) both plans satisfy the coverage rules immediately before the acquisition; and 2) there are no significant changes in either the terms of the plan or the coverage of the plans following the transaction.

Conclusion

The merging of two employer plans is a complicated and time consuming process. Fortunately, from an employee coverage perspective, there are transitional rules that give the employer some relief.

 

 

 

© Copyright 2017 Retirement Learning Center, all rights reserved