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Mandatory deferrals?


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We are fairly new to the 403(b) arena, and have a quick question that we cannot seem to find an answer to. Can a 403(b) plan REQUIRE salary deferrals at a set level? For example, we have a prospect that mandates all eligible participants defer 5% of pay. I know DB plans can have mandatory after-tax contributions, but I've never heard of mandatory pre-tax deferrals in a DC plan. Any info would be appreciated. Thanks!

J

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Mandatory employee contributions (i.e., as a "condition of employment") to 403bs are not uncommon. However, if the plan is not subject to ERISA, the plan would be subject to state laws, in which case you would need to check the laws of the state governing wage payment and collection, which might prohibit involuntary contributions.

Assuming there is no legal prohibition to mandatory contributions, they can be pre-tax. If pre-tax, I believe they are NOT treated as elective deferrals for purposes of the 402g limit, but they ARE treated as salary reduction contributions for FICA/Medicare tax purposes.

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State wage payment laws are not an issue in public plans because the terms of mandatory employee contributions are negotiated in collective bargaining agreements between the employer and the union representing the employees, e.g., each faculty member will contribute 5% of salary and the university will contribute 10% to each members 403b annuity.

Separately if employee contributions are a condition of employment then state wage payment laws will not apply because the employee will be terminated if a salary reduction agreement is not in effect.

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  • 3 weeks later...

"Assuming there is no legal prohibition to mandatory contributions, they can be pre-tax. If pre-tax, I believe they are NOT treated as elective deferrals for purposes of the 402g limit, but they ARE treated as salary reduction contributions for FICA/Medicare tax purposes."

jpod-

Can you give me a cite or reference to where we could research your these deferrals NOT being treated as elective deferrals for purposes of the 402(g) limit? Thanks!

J

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The most recent discussion of this issue is in the preamble to regulations under Section 3121(a)(5), which were published in the regulations in Nov. 2007 (or thereabouts).

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  • 3 weeks later...

mjb: Your reply intrigued me because we have a client with that set up -- EE must contribute 5% in order to get the ER's 10%. That sounded like a violation of the Universal Availability rule to me. Is it not?

If the employer agrees to contribute 2 times an EE's deferral (whatever percentage that might be) up to no more than 10%, then it would qualify as a match, right? However, is there a problem between the EE that defers 2% and gets 4% from the ER vs the EE that defers 5% and gets 10% from the ER?

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Universal availability only pertains to allowing all eligible employees to make a salary reduction contribution. It does not require any employer match. Most plans that have an employer match usually require all eligible employees to a make a minimum fixed employee contribution of say 5% of pay as a condition of employment because the 403b plan is the the primary retirement plan offerred. Mandatory employee contribution plans are common in 403b plans of higher education and colleges where the employer match is negotiated through collective bargaining.

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Mandatory employee contribution plans are common in 403b plans of higher education and colleges where the employer match is negotiated through collective bargaining.

... and even when there is no collective bargaining.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • 1 month later...
Guest aciepluch

Even though mandatory employee contributions are not treated as elective deferrals, would employer contributions that are made on account of those mandatory deferrals be tested under 401(m) as a matching contribution or would they be tested under 401(a)(4)?

401(m) testing (as opposed to 401(a)(4)) testing is desirable for a particular client because it contributes 6% of compensation for NHCEs and 8% of compensation for HCEs, but I am having a hard time finding a basis for treating these contributions as matching contributions.

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  • 2 months later...
Even though mandatory employee contributions are not treated as elective deferrals, would employer contributions that are made on account of those mandatory deferrals be tested under 401(m) as a matching contribution or would they be tested under 401(a)(4)?

401(m) testing (as opposed to 401(a)(4)) testing is desirable for a particular client because it contributes 6% of compensation for NHCEs and 8% of compensation for HCEs, but I am having a hard time finding a basis for treating these contributions as matching contributions.

The definition of "matching contribution" is a contribution made on account of an "elective contribution" or an "employee contribution". See Reg sec 1.401(m)-1(f)(12). The mandatory deferral is not an "elective contribution", but it seems to me it is an "employee contribution". (After all, the mandatory contribution is still subject to payroll tax withholding.) Thus, I think the employer contribution is a matching contribution and should be tested under IRC sec 401(m).

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  • 2 years later...

http://sungard.com/sitecore/content/campai...o403bplans.aspx

Very very relevant article on mandatory contributionsby Steve Forbes...

Some 403(b) plans provide for mandatory contributions. In this situation, making the contribution is a condition of employment. Such a condition may arise from a statute or contract, or may simply be the employer’s policy.

Both of these types of contributions reduce the employee’s wages for tax purposes. The FICA rules count these contributions as wages. However, neither type of contribution is an elective deferral for purposes of a 403(b) plan under Treas. Reg. §31.3121(a)(5)-2, which the Treasury finalized in November 2007. Accordingly, these contributions are nonelective employer contributions as far as the plan is concerned. Except for church plans and governmental plans, these contributions are subject to nondiscrimination testing under Code §401(a)(4). They are not subject to the universal availability rule (and cannot be used to satisfy that rule) or the 402(g) limit. Unlike conventional elective deferrals, these contributions are not included in gross compensation for purposes of 415 or other Code provisions which reference the 415 definition of compensation.

Austin Powers, CPA, QPA, ERPA

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