(b)lines Ask the Experts – Rolling Over from One Plan to Another Within a Controlled Group

“I work for a large health care organization that encompasses several subsidiaries that counsel has determined are part of the same controlled group.

“Thus, we treat employees of all subsidiaries as one employer for eligibility, vesting, and other applicable retirement plan provision, such as whether a severance from employment has occurred. However, we have a situation where a physician who was employed by one of our hospitals transferred to one of our for-profit physicians’ practices that is part of the controlled group. The physician wishes to take a distribution from his hospital-sponsored 403(b) plan and roll it over to the 401(k) sponsored by the physician’s practice. Though the 401(k) plan permits such a rollover, the 403(b) plan does not permit distributions until severance from employment, and we do not consider the employee to have incurred a severance from employment due to the controlled group rules. However, our recordkeeper has stated that such a distribution/rollover is permitted. What say the Experts?” 

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

First of all, the Experts commend you for obtaining the proper legal determination as to which entities are part of your controlled group and properly administering such entities as if they were a single employer for certain retirement plan provisions as required under the final 403(b) and related regulations under 414(c). In the Experts’ experience, a significant number of 501(c)(3) organizations do not properly administer such rules, and do so at the risk of defects related to such improper administration being discovered upon audit.

To get back to your specific question, this is an example of a controlled group provision that is unique to 403(b) plans. The final 403(b) regulations specifically address this issue:

“The final regulations, like the 2004 proposed regulations, define severance from employment in a manner that is generally the same as the regulations under section 401(k) (see §1.401(k)-1(d)(2)), but provide that, for purposes of distributions from a section 403(b) plan, a severance from employment occurs on any date on which the employee ceases to be employed by an eligible employer that maintains the section 403(b) plan. Thus, a severance from employment would occur when an employee ceases to be employed by an eligible employer, even though the employee may continue to be employed by an entity that is part of the same controlled group but that is not an eligible employer, or on any date on which the employee works in a capacity that is not employment with an eligible employer. Examples of the situations that constitute a severance from employment include: an employee transferring from a section 501(c)(3) organization to a for-profit subsidiary of the section 501(c)(3) organization; an employee ceasing to work for a public school, but continuing to be employed by the same State; and an individual employed as a minister for an entity that is neither a State nor a section 501(c)(3) organization ceasing to perform services as a minister, but continuing to be employed by the same entity.“ 

Thus, in your situation, since the employee in question no longer works for an employer eligible to sponsor a 403(b) plan (the for-profit physicians’ practice), a severance from employment has indeed occurred, even though the employee remains employed by a member of the controlled group. Thus, your recordkeeper is correct, and the physician is indeed eligible for a distribution from your 403(b) plan that may be rolled into the 401(k) plan of your physicians’ practice.


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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