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electing / nonelecting plan, etc.


Guest PMiller

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Guest PMiller

We have a 403(b) sponsored by a church which was established 1/1/03. We must determine if it is/can be a "nonelecting" or "electing" plan. We use the Franklin-Templeton ad. agreement and custodial agreement. The adoption agreement allows for setting eligibility (for participation) requirements and age 21 & 1 yr. svc were established. Also, excluded ordained staff (3 pastors) all of whom are covered by a denominational plan. No HCEs in the covered group (1 of the pastors may be an HCE though I don't know that for sure). An employer discretionary contribution may be made to participants who earn a yr. of service in the plan year. 1] Is this plan electing or nonelecting? 2] Are there any problems with excluding ordained staff? 3] Is this plan subject to ADP (if there were any eligible HCEs)? If it is an electing plan (no election statement has been filed), I understand this can be filed with a 5500 - is there a specific format or a standard form available somewhere? If we got this all wrong, what to do to fix? Thanks.

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Guest Patrick Foley

The plan appears to be a church plan, since it is sponsored by a church for its employees. In that case the plan is "nonelecting" unless an election is affirmatively made by filing one with a Form 5500.

Do you want the plan to be subject to ERISA or not? Nonelecting plans have the advantage of being less heavily regulated, but the flipside is that they're stepchildren in the marketplace. (For example, your Franklin Templeton documents are probably written for ERISA plans.) Also, disputes and fiduciary questions under nonelecting plans are subject to state law rather than ERISA.

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Guest PMiller

Yes, the ad. agr. is written for ERISA. If the plan wants to be nonelecting, is that a problem, or are you saying that because it is written that way, you must comply with its terms and you may as well be an electing plan? Also, what is the significance of issues being resolved at state level vs under ERISA (we're in PA and I know you are in CA)? Thanks.

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Guest Patrick Foley

The ERISA election determines the outer limits on some adoption agreement elections - for example, the age 21 and 1 year of service are ERISA requirements; non-ERISA church plans can have less liberal age and service requirements. But having adopted an adoption agreement and custodial agreement, your plan is bound by their terms as written whether you elect ERISA coverage or not.

Besides the terms of the plan itself, ERISA election or non-election status determines the reporting and disclosure rules that apply to the plan and the legal "environment" in which regulation occurs and disputes are resolved. My experience is that, in general, ERISA provides participants with more rights (and plan sponsors with more responsibilities) re disclosure of plan documents and finances than state trust law does, but as to actual remedies when something has gone wrong, ERISA restricts participants and favors employers more than state law does. Of course, depending on specific situations and rules, it may or may not work out that way in any particular case.

Although an election of ERISA coverage is irrevocable once it is made, the election doesn't have to be made within any particular timeframe after the plan is established. So, if you wish, your plan can go forward as a nonelecting plan and, if at some time in the future you think it appropriate to elect ERISA coverage, make the election then.

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Also note that there is a letter ruling (fairly old, if I remember correctly) that states including ERISA language in a plan does not invoke an ERISA election.

For example, if a church plan adopts a prototype, it certainly must follow the terms of the plan. But, where ever an outside interpretation of an ERISA provision is necessary, there is no need to look to regulations. And, if ERISA is amended, it doesn't automatically apply.

In this situation, the ERISA provisions would be revocable.

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