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Case of the Week: What’s a ‘Successor Plan’?

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Ohio is representative of a question we commonly receive related to terminating 401(k) plans. The advisor asked:

“I have a client firm that is an IRC Sec. 501(c)(3) tax-exempt organization that established a 401(k) plan several years ago. The firm is considering terminating its 401(k) plan and setting up a 403(b) plan instead. What is the rule about 401(k) plan terminations and successor plans?”

Highlights of Discussion

• IRC §401(k)(10)(A) provides that a 401(k) plan which is terminated cannot distribute the elective deferrals portion of participants’ accounts if the employer maintains or establishes a successor plan (a.k.a. an alternative DC plan) within a certain period of time following the termination.
• The successor-plan rule was created to prevent employers from circumventing the age 59-1/2 distribution restriction that applies to salary deferrals by simply terminating the 401(k) plan and immediately establishing a new one.
• A plan is an alternative DC plan for this purpose only if it is a plan that exists at any time during the period beginning on the date of plan termination and ending 12 months after all the assets from the terminated plan are distributed.
• Treasury regulations state that the following DC plans are not considered alternative or successor plans:
— Employee stock ownership plan (ESOP)
— Simplified employee pension (SEP) plan
— Savings incentive match plan for employees (SIMPLE) IRA plan
— 403(b) plan
— 457(b) or (f) plan (Treasury Regulation 1.401(k)-1(d)(4)(i))
• There is one more exception: DC plans that otherwise would be considered a successor plan are not if at all times during the 24-month period beginning 12 months before the date of plan termination, fewer than 2% of the employees eligible to participate in the 401(k) plan at the time of its termination are eligible to participate in the new DC plan.


The IRS does not consider a 403(b) plan to be an alternative defined contribution plan with respect to the successor plan rules of IRC §401(k)(10)(A). Therefore, the 501(c)(3) tax-exempt organization, in this case, would be free to set up a 403(b) plan without restriction if it decides to terminate its existing 401(k) plan.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.