(b)lines Ask the Experts – Can Split Plans Be Combined for Nondiscrimination Testing?

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning 403(b) plans and regulations.

“I work with a 403(b) ERISA plan sponsor that, to avoid the large plan audit requirement, is splitting its plan into two separate plans. Plan provisions will be exactly the same for the two split plans as for the existing plan. Since the plans have provisions that are identical, can nondiscrimination testing be performed as if the plans were a single plan?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

Indeed, if the plan provisions are exactly the same, it is possible for all nondiscrimination testing (including actual contribution percentage testing, if applicable) to be performed as if the two plans were a single plan. This is critical since, depending upon the demographic makeup of the two split plans, testing that passed as a single plan could fail as separate plans. Of course, Employee Retirement Income Security Act (ERISA) counsel with specific expertise in this area should work with the plan sponsor to ensure that it accomplishes what it wishes to do without raising any legal issues. In addition, the plan auditor should be consulted so that the proper disclosures of this action are made in the plan’s financial statements and that Form 5500s with the proper plan numbers are filed accordingly.

However, the Experts would be remiss in not pointing out the fact that, despite the attractiveness of saving money on a plan audit, there are other significant compliance barriers to splitting one plan into two, including, but not limited to, the following:

1) Separate reporting and disclosure requirements (plan documents, SPDs, SARs, 5500s, etc.). The plan sponsor has essentially doubled its responsibilities here, as well as its chance for error.

2) Separate financials (though unaudited) and participant statements/infrastructure for each plan.

3) Separate fiduciary responsibilities for each plan.

4) Unique issues with multiple plans, including the proper tracking of employee eligibility for each plan, as well as what happens to employees who transfer between plans due to a change in position.

In addition, if the reason that the plan now exceeds the 100/120 participant requirement for a large plan audit is due to participant growth, splitting plans may be merely delaying the inevitable audit requirement when one (or both) of the split plans reaches the participant threshold again down the line.

Thus, rather, than splitting plans into two, the Experts often work with plan sponsors to exhaust all other possible remedies to keep the plan under the 100/120 participant threshold, including cashing out small balances of terminated employees. However, with the general requirement of universal availability to make elective deferrals for 403(b) plans, the Experts realize that this can be a difficult task. Indeed, the added effort described above to administer split plans may be worth it, given the substantial cost savings associated with no longer having to have an audit performed, particularly for smaller nonprofits.


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.

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