Embed Size (px)
Citation preview
1
403(b) Plans
William C. Grossman, ERPA, APA, QPA, GFS,
McKay Hochman Consulting, A DST Systems Inc. Company
2
William C. Grossman, ERPA, APA, QPA, GFS, McKay Hochman Consulting, A DST Systems Inc. Company
William Grossman has been with McKay Hochman Co., Inc. for
over 14 years and has had various positions there including
Director of Education and Communication and Senior Consultant.
Bill is the mhco.com and E-mail Alert editor. Bill is the primary
author of most of the mhco website articles and the firm’s three
newsletters. Bill is an ERPA. Bill was Director of 401(k) Training
for a major record keeper, and has over 20 years’ experience
running a bank’s 1 billion small retirement plan and IRA business.
Bill has a BA from New Jersey City University, an MBA from
Fairleigh Dickinson University and is a graduate of the NY AIB
where he served as an instructor for 17 years. Bill was NIPA’s
Volunteer of the year in 2011.
3
AGENDA
• What is a 403(b), a historical perspective
• Which entities are eligible to sponsor a 403(b) plan;
• The differences between an ERISA and Non-ERISA
403(b) plan;
• A comparison of 401(k) and 403(b) plans; and
• How to leverage the 403(b) rules into optimal plan design
4
What Is a 403(b)? A Historical Overview
5
• 403(b)(1) arrangements started in 1958 for employees
in certain tax-exempts to save for retirement. Limited to
annuity contracts issued by insurance companies –
individual contracts or group contracts.
• 403(b)(7) added in 1974 permitting investment in
mutual funds (registered investment companies) in
custodial accounts.
Historically
6
Historically – 403(b) arrangements pre-date ERISA
Year Legislation/Regulation
1958 Section 403(b) written by Congress
1964 Original regulations
1974 ERISA and Custodial Accounts
1978 403(b) Rollover to IRA
1986 401(a)(4), (a)(9); 410(b)
1990 Revenue Ruling 90-24 creating ―90-24 transfers‖
2004 Proposed 403(b) Regulations
2007 Final Regulations Issued
2009 Final Regulations Operational
7
Historically - Prior to 2007 final regulations
• Non-ERISA 403(b)s: worked somewhat like an IRA with
salary reduction contributions
• Often sold directly to the employees of a school by an annuity
vendor and then controlled by the employee.
• So employee controlled the 403(b), like individual controls an
IRA once the SEP contribution is made
• Were able to be moved by employee from vendor to vendor by a
RR 90-24 transfer, like the control an IRA owner has
• ERISA 403(b) arrangements
• 403(b) with employer contribution or employer involved with
discretionary decisions, i.e. hardships, loans, etc.
8
What is a 403(b) Plan?
• Pub 571:―A 403(b) plan, aka a tax-sheltered annuity, is a retirement
plan for certain employees of public schools, tax-exempt
organizations and certain ministers.‖
• Treas. Reg. 1.403(b)-2(b)(16)(ii): ―Section 403(b) Plan means the
plan of the employer under which the section 403(b) contracts
are maintained.‖
• Individual accounts in a 403(b) can be any of the following:
• An annuity contract provided through an insurance contract,
• A custodial account invested in mutual funds,
• A retirement income account set up for church employees and
generally invested in either annuities or mutual funds
9
Not all employers are eligible to sponsor a
tax sheltered annuity
Employer Eligibility for a 403(b)
10
Eligible Employers
• Code §501(c)(3) Tax-Exempt Organizations
• Public Schools
• Churches
• Deemed Code §501(c)(3) Entities
11
Code §501(c)(3) Tax Exempt Organizations
• Religious
• Charitable
• Scientific
• Public Safety Testing
• Animal or Child Abuse
Prevention
• Literary
• Education
• Promotion of Amateur
Sports (not the sports
facility)
The employer must be organized and operated exclusively
for at least one of the following purposes:
11
12
Code §501(c)(3) Tax Exempt Organizations May Not
• Profit an individual
• A 501(c)(3) organization may not have its income or profit
accrue to the benefit of any individual,
• Influence legislation
• A 501(c)(3) organization may not influence legislation by
propaganda or other means as a substantial part of its activities
(except for certain lobbying activities),
13
• Be a Government Instrumentality in enforcement or regulation • Generally, state and municipal governments are not eligible
employers.
• But, if the organization is a separate entity that is not engaged in regulative or enforcement functions and is operated pursuant to the guidelines for 501(c)(3) organizations, it may be an eligible employer.
• When in doubt – IRS Form 1023 • Form 1023 is the Application for Recognition of Exemption
under Section 501(c)(3)
• Fee for filing Form 1023 increasing in 2010: http://www.irs.gov/charities/article/0,,id=212562,00.html
Code §501(c)(3) Tax Exempt Organizations May Not
14
Form 1023-EZ Streamline 501(c)(3) Determination – Started in 2014
• Form 1023-EZ is the streamlined version of Form 1023,
Application for Recognition of Exemption Under IRC
Section 501(c)(3).
• Eligibility Worksheet on page 11 of instructions.
• If you answer yes to any of the questions you are not
eligible to use the streamlined form.
• Example questions on next slide
15
Form 1023-EZ Streamline 501(c)(3) Determination – Example Questions
• Q1. Do you project that your gross annual receipts
will exceed $50,000 in any of the next 3 years?
Check either: • ____Yes
• ____ No
• Q3 Do you have total assets in excess of $250,000?
Check either: • ____Yes
• ____ No
• There are 26 questions
16
• Public Schools
• Primary
• Secondary
• Preparatory
• High School
• College or University
• Indian tribal government
schools
Eligible Employers
• Church Plans
• Churches
• Qualified church-controlled
organizations (QCCOs)
• Church-related
organizations
• Ministers
17
Eligible Employers Public Schools: Criteria to Be Met
• Primary function – presentation of formal instruction;
• Organization must maintain a regular faculty and
curriculum;
• Organization must maintain an enrolled student body;
• May not engage in educational and non-educational,
unless non-educational functions are merely incidental
to the educational function
18
Deemed §501(c)(3) Entities
• The following organizations have received explicit
or implicit approval from the IRS to sponsor 403(b)
arrangements:
• Cooperative Hospital Services Organization • These §501(e) organizations perform certain functions on behalf
of §501(c)(3) organizations
• Foundations • Non-profit foundations under §509(a) and private foundations
under §4942(j)(3) are eligible. They must satisfy §501(c)(3)
before they can satisfy §509(a) or §4942(j)(3).
19
Deemed §501(c)(3) Entities - Continued
• The following organizations have received explicit or
implicit approval from the IRS to sponsor 403(b)
arrangements:
• Uniformed Services University of Health • P.L. 96-613 gave permission to this organization to have a 403(b)
for civilian staff and faculty.
• Other Organizations which meet the same goals • Organizations under §170(c)(2), i.e. community chests, funds or
foundations – which meet the same goals and objectives as
required for §501(c)(3) organizations may be eligible.
• Again, when in doubt – IRS Form 1023 or, if applicable,
Form 1023-EZ
20
Ineligible Employers
• Private Hospitals
• Private Health Care Agencies
• Private Schools, that are not 501(c)(3) entities
• Private Research Facilities
• Civic leagues
• Labor organizations
• Agriculture or gardening groups
• Business leagues
• Chambers of commerce
• Credit unions
• Others
21
Typical Ineligible Employers at IRS Audit
Ineligible employers list:
Organization who do not meet the requirements and
goals of 501(c)(3),
Sometimes a for-profit subsidiary of a 403(b)
21
22
EPCRS Correction for Ineligible Employers Who Have a 403(b) Arrangement
• VCP Filing required
• EPCRS (RP 2013-12), Appendix C, Part II, Schedule
6, Correction (Renamed Form 14568-F by Rev. Proc.
2015-27):
1. All contributions under the plan ceased as of date.
2. No new contributions permitted in the future.
3. The assets in the plan will remain in the contract until
participant has a distributable event
23
Eligible Employers — Recap • Public schools
• Local school districts
• Colleges
• Universities
• Certain tax-exempt organizations, such as 501(c)(3)
entities
• Public charities
• Other organizations exempt under Section 501(c)(3) of the
Internal Revenue Code. E.g. Churches, QCCOs
• Deemed Section 501(c)(3) Organizations
24
ERISA v. NON-ERISA Agenda
• What Happens If a 403(b) Is Subject to ERISA
Non-ERISA 403(b) Plans
When a 403(b) Plan Is Subject to ERISA
• DOL Regulation 2510.3-2(f)
• DOL FAB 2007-2
• DOL FAB 2010-1
• DOL Advisory Opinion 2012-02A
25
What Happens If 403(b)
Is Subject to ERISA?
26
Effect of ERISA
If Non-ERISA Becomes Subject to ERISA
If Non-ERISA Plan Becomes
Subject to ERISA, then These
Rules Apply
Eligibility and Participation
Vesting
Spousal Rights: Beneficiary, QJSA,
etc.
ERISA Fiduciary Standards/Liability
ERISA Bonding Requirements
Prohibited Transaction
Protection from Creditors
If Non-ERISA Plan Becomes
Subject to ERISA, then These
Rules Apply
Disclosure Requirements:
• SPS, SMM, SAR
• Benefit Statements
• 404(a)(5); 408(b)(2)
• QDIA, Blackout Notice, etc.
Form 5500 Reporting
• Large Plan Audit
Penalties for Non-Compliance with
ERISA Requirements, such as, Not
Having Provided Disclosures
27
Can a 403(b) Plan Unintentionally Become an ERISA Plan?
• Yes.
• Extent of the employer’s involvement is key.
• If plan is subject to ERISA plan notes and not operated
as an ERISA plan; there is liability, e.g.:
• QJSA, spousal consent not obtained
• Fiduciary rules, Fiduciary Breach
• Disclosures not provided, SPD, SMM, Statements
• Penalties for not filing Form 5500
28
DFVCP Late Filer Penalty for a 501(c)(3)
• Q10: Is there a different per-plan penalty cap that applies to
administrators of small plans sponsored by Internal Revenue Code
(Code) section 501(c)(3) organizations (including Code section 403(b)
small plans)?
• Yes. In the case of a small plan sponsored by a Code section
501(c)(3) organization (including a Code section 403(b) small plan
required to file an annual report), the applicable penalty amount is $10
per day for each day the annual report is filed after the date on
which the annual report was due (without regard to any extensions),
not to exceed $750 regardless of the number of delinquent annual
reports for the plan submitted as part of the same DFVCP
submission.
29
DFVCP Late Filer Penalty for a 501(c)(3)
• ―This per-plan penalty cap, however, will not be available if, as of the
date the plan files under the DFVCP, there is a delinquent or late annual
report due for a plan year during which the plan was a large plan, in
which case the large plan cap will apply.
• If you are using the online penalty calculator or choose to submit to the program
electronically, you must answer ―Yes‖ on the calculator to the question ―Are you a
501(c)(3) organization?‖ If you are paying by mail you must include the notation
―501(c)(3) Organization‖ in the upper-right corner of the first page of the paper print
out of the electronically filed Form 5500 or Form 5500-SF that must be mailed to the
DFVCP, along with the penalty check.‖ http://www.dol.gov/ebsa/faqs/faq_dfvc.html
30
ERISA v. Non-ERISA 403(b)
DOL Reg. 2510.3-2(f): Safe Harbor from ERISA, and
FAB 2007-2, FAB 2010-1, Advisory Opinion 2012-02A
31
403(b) • Exempt from ERISA:
• Churches
• unless they elect to be covered by ERISA
• Government plans
• Other 501(c)(3) tax exempt entities are subject to Title 1 of ERISA • unless certain conditions are met
Comparison of 403(b) and 401(k)
ERISA Requirements
401(k)
• All 401(k) plans subject to
ERISA
• Exceptions • Churches;
• unless they elect to be
covered by ERISA
• Governmental plans
opened prior to May 6, 1987
32
Does ERISA Apply to 403(b) Plans?
• ERISA Section 3.2A Definitions • … ―the terms ―employee pension benefit plan‖ and ―pension plan‖ mean
any plan, fund, or program which was heretofore or is hereafter
established or maintained by an employer or by an employee organization,
or by both, to the extent that by its express terms or as a result of
surrounding circumstances such plan, fund, or program—
• (i)provides retirement income to employees, or
• (ii)results in a deferral of income by employees for periods
extending to the termination of covered employment or beyond
33
Safe Harbor from Being an ERISA 403(b)
• Safe harbor rules for a 403(b) plan to be exempt
from ERISA are in regulation 2510.3-2(f). Generally,
403(b) plan Not exempt if: • Employer contributions
• Employer is making discretionary decisions
• Employees do not have a reasonable choice of investment
• 403(b) plan must also satisfy FAB 2007-2, FAB 2010-1
and Advisory Opinion 2012-02A
34
Non-ERISA Arrangements General Requirements
• Voluntary Participation
• Right enforceable solely by the participant • or beneficiaries or authorized representative
• Employer receives either no compensation, or
reasonable compensation for arrangement
• Employer involvement is administrative only
• NO Employer Contributions
• NO Mandatory Contributions
Where is this found?
35
ERISA Regulation 2510.3-2(f) Limited Employer Involvement
• ―Limited involvement‖ exemption available if All of the
following conditions are satisfied: • Participation is completely voluntary for employees
• Employee can enforce contract
• Employer gets no direct or indirect benefit other than
reasonable expenses actually incurred
• Employer’s involvement is limited to:
A. Allowing product providers to publicize their products to
employees
B. Requesting information about the products
C. Summarizing or compiling information provided for employees
D. Collecting or remitting employee contributions
E. Maintaining records, e.g. holding group contracts in employer’s
name
F. Selecting annuity contractors, limiting to a reasonable number
selected to offer ―reasonable‖ choice
36
29 CFR 2510.3-2(f)
2 CFR 2510.3-2(f) (3) (vii) After February 6, 1978, limiting the funding media or products available to
employees, or the annuity contractors who may approach employees, to a
number and selection which is designed to afford employees a reasonable
choice in light of all relevant circumstances. Relevant circumstances may
include, but would not necessarily be limited to, the following types of factors:
A The number of employees affected,
B The number of contractors who have indicated interest in approaching
employees,
C The variety of available products,
D The terms of the available arrangements,
E The administrative burdens and costs to the employer, and
F The possible interference with employee performance resulting from direct
solicitation by contractors; and
(4) The employer receives no direct or indirect consideration or compensation in cash or
otherwise other than reasonable compensation to cover expenses properly and
actually incurred by such employer in the performance of the employer's duties
pursuant to the salary reduction agreements or agreements to forego salary increases
described in this paragraph (f) of this section.
37
FAB 2007-2
• DOL issued FAB 2007-2 simultaneous to the final
403(b) regulations to:
• Explain that the employer’s adoption of a written plan does
not automatically subject the 403(b) plan to Title 1 of
ERISA, and
• State what the employer may and may not do, regarding
the written plan requirement while remaining within the
safe harbor from being an ERISA plan.
• State that safe harbor from ERISA regulation 2510.3-2(f)
remains operative
• Compliance with the final 403(b) regulations will not
necessarily cause a 403(b) to become covered by ERISA.
38
ERISA Exemption Safe Harbor Clarifications under FAB 2007-2
• What employer actions are permitted under FAB 2007-2
and the 403(b) still be in the safe harbor?
• Establish a written plan
• Review structure/operation of plan for discrimination, limits
and tax issues
• Correct failures; EPCRS: Rev. Proc. 2013-12, 2015-27 and 28
• Transmit information employer knows, i.e. address, service,
compensation, doctor’s certificate e.g. for hardship purposes
• Limit funding media or products available to employees, or the
annuity providers who may approach employees, provided a
―reasonable choice‖ available
• Terminate the 403(b) plan
38
39
Employer Activities That Are Permitted Under the Safe Harbor; FAB 2007-2
• If individual contracts fail to satisfy tax qualification
requirements, even if due to actions/errors of an
employee or annuity contractor, then employer can be
liable to the IRS for: • potentially substantial penalty taxes,
• correction fees, and
• employment taxes on salary deferrals
• Under FAB 2007-2, Employer may: • Fashion and propose corrections, use EPCRS
• Develop improvements that will prevent tax defects
• Obtain cooperation of outside entities involved in the
program needed to correct defects, and
• Keep records of its activities
40
Employer MAY NOT Perform the Following and Be Within the Safe Harbor; FAB 2007-2
• Employer may NOT be responsible for, or make
discretionary determinations in, administering the
program. For example: • Authorizing plan-to-plan transfers
• Processing distributions
• Satisfying the QJSA requirements
• Determining a hardship
• Determine eligibility for, or enforcement of, loans
• QDRO determinations
• Automatic Enrollment
41
OUTSIDE the Safe Harbor, FAB 2007-2
• The Employer May NOT:
• Negotiate with annuity providers or account
custodians to change the terms of their products
for purposes such as setting the conditions for
hardship withdrawals
42
Recap of Actions That Will Take the Employer Outside of the Safe Harbor
• What actions will take the employer outside of the safe
harbor?
• Employer contributions
• Mandatory contributions
• Limiting ―Reasonable Choice‖
• Authorizing transfers
• Processing distributions
• Determining the eligibility for:
• Hardship distribution
• Participant Loan
• QDRO
• Automatic Enrollment
42
43
Field Assistance Bulletin 2010-1
• Non-ERISA Clarifications
• Does ER Choosing Only One Vendor Satisfy the
―Reasonable Choice‖ criteria in the safe harbor?
44
FAB 2010-1 ERISA Exemption from Safe Harbor
• Under FAB 2010-1, the Employer may:
• Limit providers to those who assume responsibility for
discretionary decisions
• Include optional features such as participant loans in
403(b) plan, but only if handled by the investment provider.
• Refuse to include contracts if they are either too costly, or
if they would involve ER in discretionary decision making
• Discontinue the use of a vendor who is not complying with
Section 403(b)/final 403(b) Regulations and still be a non-
ERISA plan
45
FAB 2010-1 ERISA Exemption from Safe Harbor
• The Employer may NOT:
• Unilaterally move from one provider to another. If an
employer does this, the plan will be an ERISA 403(b)
• Hire a TPA to make discretionary decisions without losing
the ERISA exemption and thus the non-ERISA plan will be
subject to ERISA. However, the employer may assign
discretionary determinations to the annuity provider, who
may in turn hire a TPA without the plan losing safe harbor
status.
46
Is a 403(b) Plan That Limits the Number of Investments Subject to ERISA?
• Possibly.
• Employer may limit number of investments choices
available to employees, provided it does not preclude a
―reasonable choice‖ of products and funding
companies.
• If employer limits funding access to the extent that its
employees do not have a reasonable choice of
investment alternatives, the plan is an ERISA plan.
47
Safe Harbor DOL Regulations Regarding Reasonable Choice
• Employer may limit:
• the funding media or
• products available to employees, or
• the annuity contractors who may approach employees, to a
number and selection which is designed to afford employees
a ―reasonable choice‖ in light of all relevant circumstances.
48
FAB 2010-1 ERISA Exemption – 1 Vendor?
• To be a “safe harbor arrangement” under 29 CFR
2510.3-2(f) must a participants “reasonable choice”
include more than one 403(b) investment vendor?
• YES!
• But there are two exceptions when one vendor may be
ok.
49
FAB 2010-1 – ERISA Exemption 1 Vendor? – Exception One
• ER may have one investment vendor to whom it will
forward payroll salary reduction contributions
• provided participants are permitted to transfer or exchange
their interest to the 403(b) account of another provider.
• Note: Employees must be provided a disclosure of any limitations and
costs associated with such transfers/exchanges before deciding to
participate. This is required in both this exception and the alternative on the
next slide.
50
FAB 2010-1 – ERISA Exemption 1 Vendor? – Alternative, Exception Two
• If cost of sending payroll deductions to multiple
403(b) vendors causes a small ER to stop making
its payroll system available to all vendors, then ER
may limit payroll to one • ER must be able to demonstrate these administrative burdens and costs
to the DOL.
• This exception is only available if the one vendor
selected is offering a wide variety of investment
products
• such as a single insurance company with access to a broad
range of affiliated investment products or a single 403(b)
compliant “open architecture” custodial account providing
employees access to a broad range of unaffiliated mutual
fund products
51
Advisory Opinion 2012-02A
52
• Employer maintains a non-ERISA 403(b) deferral only plan
• Employer also maintains a 401(k) plan which provides
matching contribution on the deferrals in the 403(b) plan
• Non-ERISA exemption would no longer be satisfied due to
the match provided on the 403(b) deferral in the 401(k)
• Question awaiting guidance is can the same employer
maintain a non-ERISA 403(b) and an ERISA 403(b) and
maintain the 403(b)s non-ERISA status?
Advisory Opinion 2012-02A
53
Differences Between
403(b) and 401(k)
No top heavy testing
Plan terminations
Investment differences
Distribution restrictions
Transfers and exchanges
Eligible Entities
Information Sharing Agreements
403(b) No Trust
Overview of Differences Between 403(b) and 401(k)
Differences Between
403(b) and 401(k)
No ADP testing
Universal Availability Rules
Special catch-up
Special Post-severance rules
415 Rules
ERISA v. Non-ERISA
Non-ERISA = No QJSA Rules
54
403(b) • 501(c)(3) entities
• Public school systems
• Public colleges and universities
• Churches organizations
• Deemed 501(c)(3) entities
Comparison of 403(b) and 401(k)
Eligible Employers
401(k) • For-profit entities; i.e. C Corp.,
S-Corp., Sole Proprietor,
Partnership, Tax-exempt
employers, etc.
• Private schools, colleges,
universities
• Churches organizations
• Gov’t Plans established prior to
May 6, 1986
55
403(b) • Deferrals:
• Immediate Eligibility
• Universal Availability (UA)
• UA Exclusions • NRA w/no US Income
• If eligible to participate in another 403(b), a 401(k), or govt. 457(b)
• Work study students
• Work Less than 20 hrs.
• Less than $200
• (Church plans, by definition, are exempt from universal availability rules.)
Comparison of 403(b) and 401(k)
Eligibility to Participate: DEFERRALS
401(k) • Deferrals:
Maximum: age 21/1 year of service
• Exclusions
• NRA w/no US income
• Collectively bargained
• Classification exclusions, provided coverage is passed.
56
403(b) ER Matching/NEC
• Maximum generally, age 21 1 year of service
(can be up to 2 years)
• Classification exclusions, provided coverage is
passed.
Comparison of 403(b) and 401(k)
Eligibility to Participate: ER Contributions
401(k) ER Matching/NEC
• Maximum generally age 21 1 year of service
(can be up to 2 years)
• Classification exclusions, provided coverage is
passed.
57
403(b)
• Annuity contracts
• Custodial Accounts
• Retirement Investment
Account for a Church
Comparison of 403(b) and 401(k)
Vehicle for Plan Assets
401(k)
• Annuity contracts
• Custodial Accounts
• Trust
• Variety of Investment
Vehicles as Permitted by
the Plan Document • Stocks, bonds, employer
securities, life insurance, real
property, certain gold and
silver coins issued by US or
state governments,
58
Comparison of 403(b) and 401(k)
Required Disclosures
401(k) • SPD, SAR, Form 5500,
Statements, etc.
• ERISA 403(b)
• Generally, same as a 401(k).
i.e. SPD, SAR, Form 5500,
Statements, etc.
• NON-ERISA 403(b)
• None
59
403(b) 1. Designated Roth
2. Age 50 Catch-up: 414(v) ($6,000 for 2015)
3. Special Catch-up: 402(g)(7) A. Requires 15 years of service
with qualified organization;
B. Up to $3,000/year based on outcome of formula up to a lifetime maximum of $15,000
Comparison of 403(b) and 401(k)
Special Contributions
401(k)
1. Designated Roth
2. Age 50 Catch-up: 414(v)
($6,000 for 2015)
60
403(b)
Year of service: • Full year (employer’s work
period, full time = 1 year of
service)
• Add together fractional year of
service. Example:
• Individual working 50% for two
years and earning $30,000 per
year has $60,000 in includible
comp. • This example’s YOS actually spans 2
years
• See Pub 571 for example
Includible Compensation –
Year of Service
401(k) Year of service:
• Generally 12 months, i.e. plan year
61
Comparison of 403(b) and 401(k) Distributions (Other Than Deferrals)
• 403(b)
• ER Contributions ANNUITY CONTRACT:
• Severance
• Prior event such as fixed period of time or stated age, or
• Disability [72(m)(7)]
• 401(a)(9)
401(k)
• ER Contributions distributed upon:
• Severance
• Hardship
• In-service
• Disability • As Defined in plan
• Death
• Age 59½
• 401(a)(9)
403(b)
ER Contributions CUSTODIAL ACCOUNT:
• Severance
• Disability [72(m)(7)]
• Death
• Age 59½
• 401(a)(9)
61
62
403(b)
• Distributable Event (final
403(b) Regs)
• All assets to be distributed
ASAP, within 12 months
• Rev. Ruling 2011-7
• Distribution of a “fully paid individual insurance annuity contract” as a 403(b)
• Employer does not control assets and may have issues trying to distribute or auto roll custodial account.
Comparison of 403(b) and 401(k)
Plan Termination
401(k) • Distributable Event
• All assets to be distributed ASAP, within 12 months
• Employer may automatically roll to IRA missing participant funds.
63
403(b)
• Successor plan rules prevent contributions to a 403(b) for 12 months.
• However a 401(k) plan may be started.
• 2% exception
• 403(b) plan may not be merged into 401(k)
• 403(b) may be started after a 401(k) is terminated
Comparison of 403(b) and 401(k)
Successor Plan Rules
401(k)
• Successor plan rules prevent contributions to a 401(k) for 12 months.
• However a 403(b) plan may be started.
• 2% exception
• 401(k) plan may not be merged into 403(b)
• 401(k) may be started after a 403(b) is terminated
64
403(b) Plan Design Basics
An Overview
64
65
403(b) Plan Design Basics Choice of Plans
• Employer’s decision to offer a 403(b) may be based on being eligible for other plans. Such as:
• A 401(k)
• A 457(b)
• A DB
• A cash balance plan
• Non-ERISA Status
• No HCEs in company, so neither a new comparability feature nor permitted disparity are needed.
66
403(b) Plan Design Basics Employer’s Objectives
• Deferrals only plan
• Employee tax savings; retirement savings
• Employer DC contributions
• ER tax deduction; EE retirement benefit
• 501(c)(3) ERISA 403(b) status
• Employer DB contributions
• In addition to 403(b) or in lieu of DB
67
403(b) Plan Design Basics Plans Available Per Entity
• Nongovernmental tax-exempt 501(c)(3) may have:
• 401(a), 401(k), 403(b), 457(b), SEP, SIMPLE IRA, SIMPLE 401(k)
• Governmental employer may have
• 401(a), 457(b); [pre-1987 401(k)], SEP, SIMPLE IRA
• Public school may have
• 403(b), 457(b)
• Church may have
• 401(a), 401(k), 403(b)(9), Nonqualified Deferred Comp. Plan, SEP, SIMPLE IRA, SIMPLE 401(k)
68
Combining Plan Types 403(b) and 401(a) Plans
• Deferrals to 403(b), no ADP testing
• And/or Add governmental 457(b) to double
deferral limit
• And/or Add a 401(a) plan
• Issues in adding:
• Administrative complexity; Two 5500s
• Whether testing becomes necessary; e.g. nondiscrimination,
415, etc.
69
Combining Plan Types 403(b) and 401(k) or 401(a) Plans
• A Sample Plan Design Strategy
• HCEs only defer to 403(b)
• NHCEs only defer into 401(k)
• 401(k) passes ADP
70
457(b) Plans
• Eligible 457 plans under 457(b)
• Eligible Employers for 457(b):
• 501(c)(3) and governmental
• ―Eligible Plans‖
• similar to 403(b) and 401(k)
• Design for a select group of management and
HCEs.
71
457(b) Plans
• Contribution limit for a 457(b) is set under Section
457(e)
• The limit for all contributions for year is $18,000 in 2016,
plus catch-up
• Total of EE and/or ER Contributions, (Deferrals , matching,
nonelective).
• Not subject to 402(g) limit
• Reference for annual limit amount, plus catch-up
72
457(b) Plans
• Governmental organizations
• Municipalities, states, public schools
• Not-for-profit 457(b) ―Eligible Plans‖
• Able to offer to a select group of HCEs or management
employees.
• Opportunity for select employees to double deferrals and
contributions.
• This is just an introduction to 457(b) and not a course
on the subject
73
Overview of 403(b) Guidance
74
403(b) Code Sections
Code
Section
Covering
403(b)(1) General Rules, Annuities
403(b)(3) Includible Compensation
403(b)(4) Years of Service
403(b)(5) Application to More than One Annuity
403(b)(7) Custodial Accounts for Regulated Investment Company Stock
403(b)(8) Rollover Amounts
403(b)(9) Retirement Income Accounts Provided by Churches, etc.
403(b)(10) Distribution Requirements
403(b)(11) Requirement that Distributions Not Start Before Age 59½
403(b)(12) Nondiscrimination Requirements
403(b)(13) Trustee-to-trustee Transfers to Buy Permissive Service Credits
403(b)2) & (6) Repealed
75
Final 403(b) Regulations of July 26, 2007
Effective Jan. 1, 2009
Regula
tion
Covering
1.403(b)-1 General Overview of Taxability Under an Annuity Contract Purchased
by a section 501(c)(3) Organization or a Public School
1.403(b)-2 Definitions
1.403(b)-3 Exclusion for Contributions to Purchase Section 403(b) Contracts
1.403(b)-4 Contribution Limitations
1.403(b)-5 Nondiscrimination Rules
1.403(b)-6 Timing of Distributions and Benefits
1.403(b)-7 Taxation of Distributions and Benefits
1.403(b)-8 Funding
1.403(b)-9 Special Rules for Church Plans
1.403(b)-10 Miscellaneous Provisions
1.403(b)-11 Applicable Dates
1.414(c)-5 Certain Tax Exempt Organizations
76
Recent Guidance
Guidance Date Topic
Final 403(b) Regulations July 26, 2007 First Regulations in 40 years
FAB 2007-2 July 24, 2007 Written Plan and Non-ERISA
Rules
Rev. Proc. 2007-71 Nov. 27, 2007 Model School Plan, What Accounts in a
Plan
IRS Notice 2009-3 Dec. 11, 2008 Extension to Deadline to Adopt Written Plan
to Dec. 31, 2009
IRS Announcement 2009-34 Apr.14, 2008 Draft Rev. Proc.
FAB 2009-02 July 20, 2009 Form 5500 Guidance
IRS Announcement 2009-89 Dec. 29, 2009 RAP, Intention for Rev. Proc.
FAB 2010-01 Feb. 17, 2010 Clarifications: 5500; ERISA
SBJCA, Notice 2010-84 Sept. 27; Nov. 26,
2010
In-Plan Roth Rollover
Rev. Rul. 2011-7 Feb. 22, 2011 403(b) Plan Termination
Advisory Opinion 2012-02A May 5, 2012 401(k) Match on 403(b) Deferrals =
ERISA Plan
77
Recent Guidance
Guidance Date Topic
Rev. Proc. 2013-12 Dec. 31, 2012 EPCRS: 403(b) non-
amender rules
ATRA, Notice 2013-74 Jan. 2; Dec. 11,
2013
In-plan Roth Rollover –
otherwise
nondistributable
amounts
Rev. Proc. 2013-22 Mar. 28, 2013 Established Pre-
Approved Program
Rev. Proc. 2014-28 Mar. 25, 2014 Pre-approved Plan
Submission Extended to
Apr. 30, 2015
Rev. Proc. 2015-22 Feb. 26, 2015 Revised Fees and
Address for Pre-
approved Plan
Submissions
Revised 403(b) LRMs Mar. 29, 2015 Revisions to 403(b)
LRMs
78
79
Questions and Comments
• Thank you for attending
• Questions and Comments Time
80
FOLLOWING SLIDES ARE FOR REFERENCE
403(b) Plan Design and the
415 Annual Additions Limit
81
415 Limit Issue
1. Aggregation of all 403(b) plans of the same employer for the
annual additions limit ($53,000 in 2016).
• Including related employers
2. 415 limit applies separately to each unrelated employer’s
403(b).
3. 415 limit is generally applied as if the employee, and not the
employer, maintains the plan.
4. Generally, the 403(b) plan is not aggregated with the qualified
plan for 415 purposes.
82
415 Limit Issue Example 1
Tax-exempt hospital has 403(b) plan and a qualified plan, i.e. a profit sharing plan.
• Doctor A defers $18,000 to hospital 403(b).
• Hospital provides match of $6,000.
• Hospital allocates $44,000 in profit sharing plan for Doctor A. • Total of $68,000 for Doctor A.
• 415 not violated, because:
• $24,000 in 403(b) treated as Doctor A’s own plan.
• $44,000 in profit sharing plan treated as hospital’s plan.
83
415 Limitation Issues
Special aggregation rule requires 403(b) plan to be aggregated with qualified plans for annual additions limit IF:
• Participant controls an employer
• 403(b) plan aggregated with all DC plans that participant maintains as the one in control of employer
• Treated as if the controlled employer also maintains the 403(b) plan.
• Control defined as owning more than 50% ownership in the other business.
84
415 Limit Issue Example 2
Dr. B works for a tax-exempt hospital and has controlling ownership.
Hospital: 403(b) plan & profit sharing plan.
• Due to controlling interest, the 403(b) and qualified plan are combined for 415 annual additions.
• NOTE: The aggregation is only with respect to the annual additions for Dr. B’s benefits under the 403(b) plan and the profit sharing plan. • As other employees have no control, they are not subject to
aggregating 403(b) and profit sharing annual additions.
85
Occurrence of Excess Annual Additions in a 403(b), Example 3
Dr. Who works for hospital with a 403(b) plan.
Dr. Who owns 100% of Corporation A, with a profit sharing plan.
• Hospital has a great year and contributes $25,000 for Dr. Who to 403(b) plan.
• Corporation A contributes $40,000 to the profit sharing plan for Dr. Who.
• Since Dr. Who controls A, the Dr. Who’s 403(b) plan and profit sharing plan contribution amounts are aggregated for 415 limit purposes.
86
Occurrence of Excess Annual Additions in a 403(b), Example 3
• Dr. Who’s aggregate annual addition is $65,000. • $12,000 Excess Annual Addition ($65,000-$53,000)
•
• $12,000 of the $25,000 contributed to 403(b) plan is considered a disqualified contribution.
• Currently includible in Dr. Who’s gross income.
• 403(b) compliance requires a separate account to be maintained for the disqualified contributions.
§§1.415(a)-1(b)(2) and 1.403(b)-3(b).
Similar example in §1.415(g)-1(b)(3)(iv)(C)(2)
87
Correction of Excess Annual Additions in a 403(b)
If the §415(c) annual additions limit is exceeded, the amount in excess is treated as a §403(c) contract, (rather than a §403(b)).
• The remaining portion of the contract continues to be subject to IRC §403(b), IF:
1. Separate accounts are maintained for 403(b) and 403(c) portions of the contract for the year of the excess and each year thereafter.
2. Failure to separately account for the excess annual additions can result in the immediate taxation of the affected participant's entire 403(b) contract.
§1.415(a)-1(b)(2) and §1.403(b)-3(b)(2)
88
Tax-exempt Controlled Group Rules and Plan Design
89
Controlled Group Rules
Two (or more) tax-exempt entities are treated as a
single employer if 80% of directors or trustees of one
organization are:
• Representatives of or
• Directly or indirectly controlled by the other organization
• Power to remove & designate another
• Generally, doesn’t apply to governments and certain
churches
90
Controlled Group Rules
A trustee or director is treated as a representative of
another exempt organization: • if he or she is a trustee, director, agent or employee of the
other exempt organization.
A trustee or director is controlled by another
organization: • if the other organization has the general power to remove
them and designate new ones.
• Watch out for coverage (universal availability) and
nondiscrimination testing.
91
Controlled Group Rules
• Permissive Aggregation
• Single plan covers employees of each Org.
• Regularly coordinate day-to-day activities
• Organizations share a common purpose
• Overall anti-abuse provision
92
Controlled Group Rules Example §1.414(c)-5
• Exempt organization A has the power to appoint at least 80%
of trustees of exempt organization B.
• Organization B is the owner of all the outstanding shares of
corporation C, which is not an exempt organization.
• Organization A has the power to control at least 80% of
directors of exempt organization D.
• Then A,B,C and D are the same employer for the purposes of
any plan maintained by A, B, C and D.
93
Coverage Rules and 403(b) Plan Design
94
Coverage Rules and Plan Design
• Contributions to a 403(b) plan have to be disregarded
when determining whether coverage is passed under
qualified plan.
• Strangely, a 403(b) plan may use a qualified plan’s
contributions to pass coverage*. • * 1.410(b)-7(f)
95
Coverage and Plan Design
Givens:
• Coverage rules permit 401(k) plan to exclude HCEs.
• Universal availability rules permit employees eligible to
defer in a 401(k) to be excluded from 403(b).
96
Coverage and Plan Design
• Single ER Plan Design Concept:
• 401(k) set up with HCEs excluded.
• ADP test passes due to no HCEs.
• 403(b) set up with NHCEs excluded.
• No ADP test in 403(b).
• HCEs can maximize deferrals.
• RESULT: 401(k) for NHCE, 403(b) for HCEs
• NOTE: This does not work for matching as the excludable
employee rules under 1.403(b)(12)(A)(i) are different.
97
Coverage Rules and Plan Design;
Coverage Exemption for 501(c)(3)
98
Coverage Change from EGTRRA Background
• Suppose a tax-exempt entity has a 403(b) and a related
employer that is not tax-exempt, has a 401(k)
• Because it is not eligible to have a 403(b).
• Company with 401(k) must pass coverage for the
401(k). • If company with 401(k) cannot pass coverage, it cannot be aggregated
with the 403(b) in order to pass coverage.
Treasury Regulation Section 1.410(b)-6(g)(Issued July 21, 2006) permit
the employees of the company with 403(b) to be excluded from 401(k)
coverage test.
99
Coverage Change Background
To Qualify under the regs.* for the Treatment as excludable
Employees, two conditions must be satisfied:
1. No employee of any §501(c)(3) is eligible to participate in the
401(k) or 401(m) plan.
AND
2. At least 95% of the employees, who are neither:
• employees of a tax-exempt §501(c)(3), nor
• employees of a governmental entity who are precluded from eligibility
for a 401(k) plan, are eligible to participate in 401(k) or 401(m) plan.
* Treas. Reg. §1.410(b)-6(g), Issued July 21, 2006.
100
Coverage Example 1
Controlled group consists of:
• a 501(c)(3) hospital and
• a 100% owned for-profit pharmacy
• Hospital has a 403(b)
• Pharmacy: has a 401(k) plan for all its EEs.
• Pharmacy's 401(k) plan may exclude the hospital employees because:
• 98% of the pharmacy’s nonexcludable employees are eligible for the 401(k)
• Pharmacy’s 401(k) may exclude all the hospital’s employees when running the 401(k) coverage test as the rules of the regulation are satisfied
101
Coverage Example 1 Continued
• Further, if pharmacy’s 401(k) plan also has a matching contribution formula.
• Hospital’s employees may be treated as excludable employees when testing whether that 401(m) plan passes coverage:
• provided at least 95% of the pharmacy's employees are eligible for
the 401(m) plan.
102
Coverage Change from EGTRRA Variation on Theme
Controlled group with
• two or more tax-exempt entities
and
• a for-profit entity
• If all tax-exempt entities are excluded from the 401(k), the
95% coverage exception rule applies
• If any tax-exempt is permitted in 401(k), the 95% coverage
exception rule is not applicable
• Example on next slide
103
Coverage Example 2
Parent company and three subsidiaries • Parent, and subsidiary A and B are tax-exempt entities;
• Subsidiary C is a for-profit entity
• Parent company's employees in 403(b)
• Employees of A, B, and C in 401(k) plan
104
Coverage Example 2
Under the regulations, if the 401(k) plan covers any of the employees of a tax-exempt company
• the 401(k) plan may NOT treat the parent company
employees who are eligible for the 403(b) plan as excludable employees, even if at least 95% of the nonexcludable employees working for C are covered by the 401(k) plan.
105
Coverage: Special Rule & Matching Example 3
Parent company A; 2 subsidiaries, S and T
• A is a 501(c)(3) tax-exempt organization with a 403(b) plan --
With only deferrals.
• S and T have a 401(k) and at least 95% of employees of S
and T are eligible. There is also a match.
• Employees of A are eligible for matching formula under plan of S and
T, based on deferrals A’s employees made to the 403(b) plan*.
• For the 401(k) plan, the coverage exception is applicable,
because no employees of A are eligible for the 401(k) plan.
* Note: A’s 403(b) plan would be an ERISA plan due to the matching made in
the 401(k) on the deferrals in the 403(b). Advisory Opinion 2012-02A
