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Can 403b7 participant opt out of plan and take cash?


Guest Julie Young

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Guest Julie Young

Under the 403b7 plan in effect, the employer contributes 8% of each participant's salary to the plan. One employee has elected instead to receive the 8% in cash. First, can this be done? Second, are there any documents that need to be filed in addition to the 5500 to report this?

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Guest BENEFISH

To my knowledge, the only cash or deferred arrangement (CODA) permitted as a qualified plan under a cafeteria (Section 125) plan is 401(k). To make a long and boring story short and boring, you need a cafeteria plan to avoid "constructive receipt" of income when a cash option is involved. Thus, all employees who are eligible to receive the 8% would be taxed on that amount regardless of whether it was contributed on their behalf to the 403(B) plan or received in cash. Since 403(B) plan is not a 401(k) plan, you can't offer in cafeteria plan. Short version: you probably can't do it the way you want to do it.

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  • 3 weeks later...
Guest Brent Rowell

What about an irrevocable election to not participate in the plan? I believe it should work but have no idea if an existing employee could make that election at any time or only when hired

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Brent

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An employee can, if the plan terms so permit, opt out of the plan and take cash instead. However, two obstacles must be considered. First, if one employee is allowed a year-by-year option as to whether to participate or to take cash, all employees must be allowed such an option. I.R.C. § 403(B)(12)(ii). And once employees have this option, the contributions which are subject to such an option become subject to the I.R.C. § 402(g) limits on elective contributions.

Alternatively, you might make that employee do a one-time election before first participation in the plan as to whether to take cash or plan benefits. A couple of issues here. First, has the employee already begun participation? If so, it may be too late for an election. Second, if the plan is subject to the nondiscrimination rules of I.R.C. § 403(B)(12)(ii), the plan may become disqualified if too many nonhighly compensated employees elect to take cash rather than benefits.

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Employee benefits legal resource site

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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