The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and executive compensation arrangements. A recent call with an advisor in New York is representative of a common inquiry involving the merging of retirement plans. The advisor asked:
“I have at least one client who has both a 401(k) plan and a 403(b) plan. Could my client merge the two plans in order to consolidate the assets?”
Highlights of Discussion
Save for two exceptions, no, your client cannot merge 403(b) assets with an unlike plan (e.g., a profit sharing, 401(k), 457(b) plan, etc.) without causing the 403(b) assets to become taxable to the participants. Such a transfer could also jeopardize the tax-qualified status of the 401(k) plan.
403(b) plan assets may only be transferred to another 403(b) plan. Furthermore, the final 403(b) regulations are clear that neither a qualified plan nor a governmental 457(b) plan may transfer assets to a 403(b) plan, and a 403(b) plan may not accept such a transfer (see Treasury Regulation Section 1.403(b)-10 and Revenue Ruling 2011-07).
The two exceptions noted previously are plan-to-plan transfers by participants to governmental defined benefit plans in order to: (1) purchase permissive service credits; or (2) make a repayment of a cashout.
This does not preclude a 403(b) or 401(k) participant with a distribution triggering event (such as plan termination) to distribute and complete a rollover to another eligible plan [e.g., a 401(k) or 403(b) plan] that accepts such amounts.
While there similarities between a 401(k) plan and 403(b), the IRS treats them as unlike plans and, therefore, incompatible for the purpose of plan-to-plan transfers or mergers.
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Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2018, Retirement Learning Center, LLC. Used with permission.