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Guest 401kadmin

What are the benefits for a nonprofit to offer a 401k and 403b plan?

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Guest 401kadmin

A new client to me, has a 403b plan and 401k plan. I haven't yet received the actual plan document for the 4k and I presume the 403b is salary reduction only based on their tax exempt status. My questions are what is the benefit to offer the two plans and are there any circumstances where these two plans are combined for testing purposes and/or contribution limits, other than 402g?

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An I.R.C. Sec. 501©(3) organization can certainly offer both 403(b) and 401(k) plans simultaneously. This arrangement offers minimal advantages, however, in return for numerous administrative headaches and troubles. The Sec. 402(g) salary reductions and elective deferrals must be coordinated. An employee can't reduce his salary by more than 1X the annual 402(g) limit, regardless of the number plans in force.

It's very common (and often extremely advisable) for an employer to pair a 403(b) arrangement with some sort of qualified plan. But, go for something simpler, such as a money purchase pension plan. Why take on the extra compliance burdens of a 401(k) plan without reaping additional advantages?

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Guest 401kadmin

Thank you for your reply. I have only seen one other 403b plan paired with a qualified plan, in which, the paired plan was solely for employer contributions.

Do I need to combine the contributions under the 4k plan and 403b salary reduction contributions for ADP/ACP testing purposes or for the 415 annual additions test?

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If the 403(b) plan is a valid non-ERISA plan, you don't coordinate its Sec. 415 limit with that of the qualified plan. In effect, each employee gets to double up on his/her annual additions limit.

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Guest TGeer

As long as the employee doesn't have 50% control of any business.

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The advantage of offering the 403(b) plan is that the HCEs can contribute the max salary reduction of 14 k because there is no ADP testing. Employees of certain entities such as schools, churches, hospitals and home health care agencies can contribute an additional 3k for up to 5 years. In addition, there are separate 415 limits for the plans (although both plans are aggregated for the 402(g) limit).

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Guest Stevec
It's very common (and often extremely advisable) for an employer to pair a 403(b) arrangement with some sort of qualified plan. But, go for something simpler, such as a money purchase pension plan.

What makes this extremely advisable? I have a client with a (non-ERISA) 403(b) and a Money Purchase Plan. I can see the disadvantages of combining them into a 401(k) (i.e. ADP testing), but what is the disadvantage of just putting the employer contributions in the 403(b)? I'm much more familiar with 401(a) plans than 403(b)'s, but it seems that if they just have an ERISA 403(b) plan vs. a non-ERISA 403(b) and a MPPP, they still need to only file one 5500, but with 403(b) only it is a much simpler filing, and the independent audit is not required.

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I agree with mbozek that the idea for pairing is to let the HCEs use the 401(k) and pass ADP -- because you get to exclude all the employees eligible for the 403(b) from testing on the qualified plan.

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Guest Stevec
I agree with mbozek that the idea for pairing is to let the HCEs use the 401(k) and pass ADP -- because you get to exclude all the employees eligible for the 403(b) from testing on the qualified plan.

Right now my client has a 403(b) and a Money Purchase Plan. All deferrals go to the 403(b); thus no ADP testing is required. It is my understanding that if the employer contributions were made to the 403(b) instead of the MPP, they still would not need the ADP test. So my question is: what is the advantage of having a non-ERISA 403(b) and a MPP, versus just having an ERISA 403(b)? I believe the investment of employer contributions is more restrictive in the 403(b) (Annuity contracts only?), but are there other advantages?

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Guest mjb

Only advantage of using MPP is that employer can permit employees to self direct investments in individual stocks, bonds RE and life insurance while 403(b) plans are restricted to annuities and mutual funds. Employer contributions to 403(b) must meet same non discrimination requirements as MPP. Disadvantage of MPP plan is that employer has to provide quotes for annuity distributions which employee never elect while 403b anuity plan provide annuity benefits as the normal form.

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I don't think that mbozek is suggesting the use of a 401(k) plan. Mbozek's message makes no mention of 401(k), and I believe he's agreeing with my recommendation to pair a non-ERISA 403(b) plan with a money purchase pension plan.

Every employee -- both HCEs and NHCEs -- can make salary contributions to 403(b) without regard to ADP testing. Why have the HCEs defer to a 401(k) plan and even bother with the additional headaches? Let the HCEs put their money in a 403(b) plan, which is never subject to the ADP test.

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Guest Stevec
I don't think that mbozek is suggesting the use of a 401(k) plan. Mbozek's message makes no mention of 401(k), and I believe he's agreeing with my recommendation to pair a non-ERISA 403(b) plan with a money purchase pension plan.

I agree with both of you that the 403(b) is a far better alternative for employee deferrals than a 401(k).

My question is: Why are you recommending the 403(b) be paired with a MPP (with the audit requirement, more extensive 5500), instead of just putting the employer contributions in the 403(b) (which would require a much simpler 5500 filing, and no audit)? Right now, I administer the MPP for this client, and another firm does the 403(b). Just having the 403(b) seems to make the most sense, but then I lose my client, so I need to find good reasons for keeping the MPP! :)

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Guest mjb

The only reason to maintain separate plans is if employer contributions for one or more employees would exceed 34,000 because the employee's salary reduction to the 403b plan would not be aggregated with employer contributions to the MPP.

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Why are you recommending the 403(b) be paired with a MPP...instead of just putting the employer contributions in the 403(b)

If you put employer contributions into a 403(b) plan:

1. The plan immediately becomes subject to ERISA. The sponsor assumes all of the obligations and responsibillities imposed by ERISA.

2. Instead of simply acting as a conduit to withhold and remit salary reductions, the employer is required to administer the plan. While it's true that the Form 5500 is a pared-down version, and that there's no ADP or top-heavy testing, the sponsor picks up all the rest of the baggage and costs that come with plan administration.

3. Highly-paid employees lose the rather incredible benefit of a dual Sec. 415 limit. (Don't let anyone convince you that a 457(b) arrangement will achieve the same goal. 457(b) assets remain the property of the employer, fully subject to creditors' claims.)

4. In a non-ERISA plan, compliance problems are generally limited to individual participants and don't place the entire plan at risk. Not so for an ERISA plan.

5. The IRS won't provide a determination letter to give the ERISA plan a "stamp of approval". (NOTE: This may have changed with last year's 403(b) regulations.)

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Guest mjb

Lori: None of the reasons you give makes sense since the employer already has a plan subject to ERISA for which there are admin costs and fiduciary risk, including trustee fees (which are not present in a 403b plan). Tranferring er contributions to a 403b plan doesn't create any greater risk but it does eliminate issues under state fiduciary law that exist in a non ERISA 403b plan. The er is alredy familiar with ERISA fiduciary issues under the MPP.The dual 415 limit only adds 15/20k and only if the employer is going to contribute more than 29k to an employee's account. Not having a determination letter is really a blessing because there no remedial amendment period for adopting amendments to a 403b plan under current regs and most compliance failures do not affect all plan participants but only individual participants, e.g., if 415 limit is exceeded only consequence is that affected employee will have taxable income for excess amt but plan is not disqualified or files for VCP.

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This is a real situation! In addition to everything in this series of postings, can the tax-exempt employer add a third plan - 457(b) and thereby get the employee another $16,500 in deferrals and $5,500 in catch up contributions?

Here is our hopeful "max out" scenario:

401(a) Plan - $49,000 total 415

403(b) Plan - $16,500 deferrals

457(b) Plan - $16,500 deferrals

457(b) Plan - $5,500 catch-up

TOTAL PERMITTED CONTRIBUTIONS 2010 - $87,500

Thanks in advance for any input.

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This is a real situation! In addition to everything in this series of postings, can the tax-exempt employer add a third plan - 457(b) and thereby get the employee another $16,500 in deferrals and $5,500 in catch up contributions?

Here is our hopeful "max out" scenario:

401(a) Plan - $49,000 total 415

403(b) Plan - $16,500 deferrals

457(b) Plan - $16,500 deferrals

457(b) Plan - $5,500 catch-up

TOTAL PERMITTED CONTRIBUTIONS 2010 - $87,500

Thanks in advance for any input.

yes 401a and 403b plans-65,500

yes- 457b plan 16,500

no- 457b plan 5,500 catch up b/c there is no catch up in a non profit 457b plan

However the employee could do a 5,500 catch up in the 403b plan if age 50.

To be eligible for the 457b the employee must be a member of the top hat group- e.g., a select group of management or highly compensated employees as defined by the employer.

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To be eligible for the 457b the employee must be a member of the top hat group- e.g., a select group of management or highly compensated employees as defined by the employer.

True, but why is this legal? Does it make any rational sense for a non-profit? It makes the "If I were King for a day" list for me.

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This is a real situation! In addition to everything in this series of postings, can the tax-exempt employer add a third plan - 457(b) and thereby get the employee another $16,500 in deferrals and $5,500 in catch up contributions?

Here is our hopeful "max out" scenario:

401(a) Plan - $49,000 total 415

403(b) Plan - $16,500 deferrals

457(b) Plan - $16,500 deferrals

457(b) Plan - $5,500 catch-up

TOTAL PERMITTED CONTRIBUTIONS 2010 - $87,500

Thanks in advance for any input.

yes 401a and 403b plans-65,500

yes- 457b plan 16,500

no- 457b plan 5,500 catch up b/c there is no catch up in a non profit 457b plan

However the employee could do a 5,500 catch up in the 403b plan if age 50.

To be eligible for the 457b the employee must be a member of the top hat group- e.g., a select group of management or highly compensated employees as defined by the employer.

Thank you for the confirmation. Very helpful!

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MBozek:  Good list. with PJ2009 comments added.   Very important to make this distinction.  Adding a catchup  contribution to a 457(b) sponsored by a 501(c)(3) Nonprofit (if the participants in the 457(b) are maxing out the 403(b)), will disqualify the 457(b).  There is no remedy if this error is discovered after April 15 of the next year.  I see way too many sponsors and advisors who have read some of the IRS' casual comments about catch ups for plans sponsored by government entities and then believe this applies to a 501(c)(3) sponsor.

Andy H..  It is legal.  "Why?" is the sort of question tax lawyers really don't care so much about!   It is an advantage for a Nonprofit because the top people can get another 402(g) limit amount of tax deferred income.  And since a 457(b) is not ERISA, there is no 5500 or annual filing and minimal administration (make sure the 402(g) limit not exceeded).

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Can I ask for a clarification on this? I know you can't have the "age 50" catch-up, but can't you have the "last 3 years before NRA" catch-up?

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