403(b) as a Successor Plan

Q. A non-profit entity has a 401(k) plan and qualifies to sponsor a 403(b) plan. It is having a hard time passing testing and the highly compensated employees are unable to contribute much in the plan. There is no employer match. The plan excludes only leased employees. The plan provides for deferral and a nonelective benefit.

Employees who elect to defer compensation into the plan are eligible to participate if they are are at least 18 years old and have at least one month of service with monthly dates for deferrals. Those for whom the benefit is nonelective must be at least 18 years old and have at least two years of service.

The entity is considering terminating the 401(k) plan and establishing a 403(b) plan so as to avoid ADP and ACP testing. It understands that the Universal Available Rules will require a change in the current eligibility and entry requirement for deferrals and that leased employees could no longer be excluded for deferral purposes.

Can the entity terminate the 401(k) and put together an initiative to capture rollovers into the new 403(b)? Would it encounter successor plan issues as they would if they were attempting to terminate a 401(k) and establish a new one?

A. Under Internal Revenue Code Section 401(k)(10)(A), a 401(k) plan which is terminated cannot establish a successor plan. Under the Treas. Reg. §1.401(k)-1(d)(4)(i), successor plans DO NOT include: ESOPs, SEPs, SIMPLE-IRAs, 403(b)s or 457(b) and (f) plans. So there is no problem establishing the new 403(b) plan.