Opinions September 16, 2008

(b)lines Ask the Expert – Transfers of 403(b) Assets

September 16, 2008 (PLANSPONSOR (b)lines) - A plan provider asks: "A nonprofit organization, on the same date terminates its DB plan, initiates a 401k plan, and stops participant payroll deductions/contributions to 403(b) accounts. Under what conditions can assets in a 403(b) account be transferred to a 401k account?"

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Under current law, amounts cannot be “transferred” from a 403(b) plan to a 401(k) plan or vice-versa. However, if a participant in the 403(b) plan becomes eligible for a distribution from that plan (e.g., upon severance from employment), and the distribution is an eligible rollover distribution, the participant can voluntarily rollover their 403(b) distribution (including in a direct rollover) to the 401(k) plan, if the 401(k) plan so permits.

Termination of a 403(b) plan by the employer provides an exception to the usual distribution restrictions and allows distributions to be made immediately, but only if there is no successor 403(b) plan. Generally, there will be considered a successor 403(b) plan if, taking into account all entities that are treated as the same employer under the controlled group rules, the employer makes contributions to any other 403(b) plan during the period beginning 12 months before the termination and ending 12 months after distribution of all assets from the terminated plan, with a de minimis exception that, beginning on the date of plan termination and ending 12 months after distribution of all assets from the terminated plan, if the successor 403(b) plan covers fewer than 2% of the employees who were eligible under the old 403(b) plan as of the date of plan termination, it can be disregarded.

In addition, under the new regulations, for a section 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan.

– David Powell, Groom Law Group, Chartered

NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.