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 .)
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.