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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Nevada is representative of a common question regarding the merging of retirement plans.
“We have a prospect with multiple companies sponsoring a 403(b) for one company and a 401(k) for the others. What steps would need to be taken to combine the plans into a 401(k) plan, or is there something that prevents the plans from being merged?”
Generally, the IRS does not allow mergers or transfers of assets between 403(b) and 401(k) plans [Treasury Regulation 1.403(b)-10(b)(1)(i)]. The IRS has stated in private letter rulings (PLRs) (e.g., PLR 200317022) that if a 403(b) plan is merged with a plan that is qualified under IRC Sec. 401(a), the assets of the 403(b) plan will be taxable to the employees.
One option to combine the assets would be to terminate the 403(b) plan, which would allow its participants to receive distributions that could be rolled into an IRA or other eligible retirement plan (See the IRS’s Terminate a 403(b) Plan for more information). The participants in the terminated 403(b) plan who receive eligible rollover distributions from the 403(b) plan would have the option to roll the amounts to the 401(k), provided the 401(k) plan permits rollover contributions (Revenue Ruling 2011-7, Revenue Ruling 2020-23, and IRS rollover chart)
IRC Sec. 501(c)(3) tax-exempt entities can maintain both 401(k) and 403(b) plans independently. The IRS does not allow a sponsor to merge the two plan types, however. A plan termination followed by participant rollovers may be a viable alternative to merging the plans.