What are the Challenges of Shutting Down a 401(a) Plan?

Q: We sponsor two retirement plans: a 401(a) plan and a 403(b) plan, both subject to ERISA. The 401(a) plan has outlived its original purpose, which was to provide two separate 415 limits for each employee. No current employee would need that flexibility, as total contributions do not exceed even a single 415 limit. It has also become increasingly more difficult and expensive to administer, and none of our participants understand why we have two plans. However, we were told by our recordkeeper that we cannot get rid of our 401(a) plan. Is this true?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Your recordkeeper is partially correct. You cannot “get rid” of your 401(a) plan by merging it into your 403(b) plan, as that is not permitted under current law.

However, you can terminate your 401(a) plan. The problem with that approach, as we stated in an Ask the Experts column from several years ago, is that your participants would then have a right to receive a distribution of their 401(a) funds and may utilize such retirement plan assets for non-retirement purposes, rather than elect to roll them over to the 403(b) plan.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.