Terminate a Plan or Merge Plans When Organizations Merge?

“I work for a 501(c)(3) private tax-exempt entity that is being merged into a larger 501(c)(3) private tax-exempt entity. Both organizations maintain Employee Retirement Income Security Act (ERISA) 403(b) plans. Does it make more sense to merge the plans, or to simply terminate our existing 403(b) plan?”

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

Excellent question! Terminating your existing 403(b) plan is not a terribly practical option in this case, since you would generally need to wait 12 months following the distribution of all assets from the terminated 403(b) plan before you could contribute to the 403(b) plan you are merging into, due to what is commonly known as the “successor plan” rule, found in Treasury Regulation §1.403(b)-10(a)(1). (Note: if the plan which you were joining was a 401(k) plan, and NOT a 403(b), this would not be an issue because a 401(k) plan is not considered a successor to a 403(b) plan).

Having said this, even without the successor plan rule, the plan merger might be the more preferable option, since it prevents plan leakage. Under a plan termination, participants could simply withdraw their funds and not move them to the new parent company’s 403(b) plan, whereas in a merger all assets would be automatically moved to the merged plan. Of course, the new plan may have features that are different, or even incompatible, with your existing plan.  And sometimes the transferor plan may have issues that may need to be corrected. As such, you will want to work closely with outside counsel well-versed in such matters to consider any qualification issues in the transferor 403(b) plan and compare the provisions of the two plans to determine how easily they can be merged, as well as to consider any existing plan features that will change as a result of you joining the new parent company’s plan.

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.