(b)lines Ask the Experts – Plan to Plan Transfers for non-Terminated Employees

The provider noted that 1.403(b)-10(b)(3)(A) of the regulations seems to say that a plan to plan transfer can be made to a former employer’s 403(b) plan, or to another 403(b) plan maintained by the current employer, and the participant does not have to be terminated from employment in order for this to occur. In addition, the provider commented, under the 457(b) regulations, specifically 1.457-10(b)(4), it seems a plan to plan transfer can be made to another 457(b) plan maintained by the same employer, with no requirement that the participant be terminated from employment.

The provider asks: “Can you confirm if this is also your understanding, or if this is not correct, then please help me with the rules for a current employee/participant who has not terminated employment?”

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:

Regarding the new provisions for plan-to-plan transfers under 1.403(b)-10(b)(3)(A), you are quite correct that the regulations do not restrict transfers by an active employee from his/her current 403(b) plan to that of a prior employer or to another 403(b) plan of his/her current employer. However, as the subsequent provisions of the regulations indicate, there are several caveats.

One major issue is the requirement that BOTH the receiving plan and the current plan permit such transfers (i.e., the current plan permits transfers OUT of that plan, and the receiving plan permits transfers INTO the plan). Having seen several completed plan documents of various plan sponsors, I can tell you that finding both a plan that permits transfers out and a receiving plan that permits transfers into the plan may be a difficult task. Many plans restrict transfers out due to vendor contract restrictions regarding such transfers, while a number of plans also restrict transfers into the plan out of concern that the any defects associated with transferred assets under the prior plan could carry over to the current 403(b) plan (the IRS’s model plan language emphasizes this concern requesting confirmation that the transferor plan is a plan that “satisfies section 403(b) of the Code”).

In addition, for ERISA plans, there are sections of the Code and ERISA that are essentially in conflict with the plan-to-plan transfer provisions. For example, suppose I have a plan with a Qualified Joint and Survivor Annuity (QJSA) provision, whereby spousal consent is required for loans and any distributions that are NOT in the form of a QJSA: If I am a participant whose assets are currently in an ERISA 403(b), but there is a non-ERISA 403(b) plan also maintained my current employer, or a prior employer, I could circumvent the spousal consent provisions by completing a plan-to-plan transfer of assets to the non-ERISA plan, where spousal consent would not be required for future loans/distributions. This is only one of many reasons that ERISA plans would not permit individual plan-to-plan transfers out of their plans.

As for 457(b) plans, you are correct with respect to GOVERNMENTAL 457(b) plans; 1.457-10(b)(4) permits active employees to transfer his/her current 457(b) plan assets to another 457(b) plan maintained by the his/her current employer (unlike the 403(b) regulations transfers are NOT permitted to plans of prior employers). However, 1.457-10(b)(5)(iv) limits transfers between plans of TAX-EXEMPT entities to those employees who have incurred a severance of employment from one plan sponsor and now wish to transfer assets to the 457(b) plan of their current TAX-EXEMPT employer; active employees of tax-exempt entities may NOT transfer plan assets. (Transfers between 457(b) plans of governmental and tax-exempt entities are prohibited under any circumstance.) Such 457(b) plan-to-plan transfers, while permissible, are relatively rare in my experience.

 

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.