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403(b) Plans for Governmental Units


Guest John Compton
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Guest John Compton

Suppose you were a municipal sewer authority, and were looking to create a 403(B) plan for your employees. Would you need to file for not-for-profit status, or are you exempt under some other section of the IR Code? Is this even an option for such an entity? Thanks!!!

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Guest CVCalhoun

Welcome to the board, John!

The only entities which can have 403(B) plans are 501©(3) organizations and public schools. "Public school" has been interpreted quite broadly, covering for example the portion of a correctional facility which provided education to inmates, even though that portion was not separately incorporated. However, absent some quite unusual facts, I cannot imagine any portion of a sewer authority qualifying as a public school.

Thus, the only way a sewer authority could have a 403(B) plan would be if it qualified as a 501©(3) organization. Typically, "lessening the burdens of government" has been seen as a valid 501©(3) purpose, so it should not have trouble from that perspective. However, there are two possible barriers to 501©(3) status. The first is the rule that if an organization does not file for 501©(3) status within a certain number of months of its incorporation, its 501©(3) status will not be retroactive. Thus, the filing (particularly in the case of an organization which has existed for a long time) should occur before the organization adopts the 403(B) plan.

The other potential issue is that some very old GCMs took the position that if a governmental entity obtained 501©(3) status, it would lose its exemption from unrelated business income taxes. It is not clear whether the position the IRS took in those GCMs was correct, but the IRS position is something to bear in mind in deciding whether a 403(B) plan is worthwhile. This is particularly true now that a governmental entity can (indeed, must) fund a section 457 plan, which has many features similar to those of a 403(B) plan.

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