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Griswold

Ineligible employee?

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Non profit #1 sets up non profit #2 and runs payroll for them. #1 lets a #2-ee into #1's plan. I see provisions in EPCRs regarding how to fix letting employees in early, but this doesn't seem to fit that. She seems ineligible to me, though she's on the payroll...

Any thoughts? 

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If they are separate 501(c)(3) organizations, trying to do a corrective amendment like you would normally do for a 401(k) plan will create a bigger mess.  By that, I mean amending the plan to allow the ineligible person from #2 to participate.  Under 1.403(b)-5(b)(3), when a 403(b) plan covers the employees of more than one 501(c)(3), Universal Availability for salary deferrals applies separately to each 501(c)(3) organization. So, if the plan allows one employee of #2 to defer, it means that all employees of #2 must be allowed to defer, unless they fit under one of the allowable exceptions in 1.403(b)-5(b)(4).  But, note that some of those allowable exclusions have an all or nothing rule attached.  I'm thinking the best option is going to be refunding deferrals to the person incorrectly allowed to defer.  Otherwise, #2 would likely not be satisfying the Universal Availability requirement for deferrals.  Going forward, they may want to look at including both #1 and #2, but I doubt they would want to do it retroactively.

 

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1.403(b)-5(b)(3) Special rules. (i) In the case of a section 403(b) plan that covers the employees of more than one section 501(c)(3) organization, the universal availability requirement of this paragraph (b) applies separately to each common law entity (that is, applies separately to each section 501(c)(3) organization). In the case of a section 403(b) plan that covers the employees of more than one State entity, this requirement applies separately to each entity that is not part of a common payroll. An eligible employer may condition the employee's right to have section 403(b) elective deferrals made on his or her behalf on the employee electing a section 403(b) elective deferral of more than $200 for a year.

It's also interesting to note that CG and ASG rules apply under 1.403(b)-5(a) "Nondiscrimination rules for contributions other than section 403(b) elective deferrals", [see 1.403(b)-5(a)(4)], but not to 501(c)(3)s under 1.403(b)-5(b) "Universal availability required for section 403(b) elective deferrals".

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If organization 1 runs payroll for both organizations, how does either plan's administrator know whether a worker is an employee of 1, 2, or both?

If the worker is classified as an employee only of org 2, might she be a leased employee or borrowed servant for org 1?

Is the retirement plan 401(a), 401(k), 403(b), 457(b), or something else?

If the plan is of a kind that can allow a nonemployee, what does the plan's document say about who is eligible?

 

 

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11 hours ago, PensionPro said:

are they a controlled group?

this was my first thought, but, I'm a bit out of my element here in the 403b category...

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11 hours ago, Fiduciary Guidance Counsel said:

If organization 1 runs payroll for both organizations, how does either plan's administrator know wether a worker is an employee of 1, 2, or both?

-- #1 has a plan. #2 does not. 

If the worker is classified as an employee only of org 2, might she be a leased employee or borrowed servant for org 1?

-- No.  But perhaps I could recast as a multiple employer plan?

Is the retirement plan 401(a), 401(k), 403(b), 457(b), or something else?

--403(b). 

If the plan is of a kind that can allow a nonemployee, what does the plan's document say about who is eligible?

N/A

Looking for the proper correction method if you know it...

2
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The Controlled Group rules were the first thing that popped into my mind. Controlled group rules in 403(b) are about control of the respective Boards.   In other words, if there is one Board of Directors for both, then this is a controlled group.  If there are two Boards but the Board for # 1 controls who is on the Board for # 2, it is a controlled group. See the following:

“Do the IRS’ controlled group rules apply to tax-exempt entities?”

  • "Yes, certain entities that are exempt from tax under Internal Revenue Code Section (IRC §) 501(a) are subject to a subsection of the controlled group rules pursuant to Treasury Regulation 1.414(c)-5. The controlled group rules, in general, require that all employees of commonly controlled entities be treated as employees of a single entity for various retirement plan qualification purposes.
  • For this purpose, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either “representatives” of, or are directly or indirectly “controlled” by, the other organization. (Please note there are separate rules that apply to church and qualified church-controlled organizations.)
  • A trustee or director is treated as a representative of another exempt organization if he or she also is a trustee, director, agent, or employee of the other exempt organization.
  • A trustee or director is controlled by another organization if the other organization has the general power to remove such trustee or director and designate a new trustee or director."

The Controlled group analysis is necessary but does not really solve your problem.  What does the document say about who is eligible for this plan?  If this is a controlled group, then, going forward, Employer #2  needs to also adopt this Plan and all employees need to be given notice that they are eligible to defer in this Plan.   If this is a controlled group, and Employer # 2 has not been an adopter or given notice to its employees, remedies should be pursued for the missed opportunity that the employees of Employer # 2 have had.  Once the Controlled group analysis is done, the problem and solutions are not unique to 403(b).

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Griswold, if they are in controlled group based on board control, then #2 could adopt plan, if that is how they wanted to handle. I don't think that would be doable without a VCP submission, however.

Whenever anyone says that an affiliate is "running payroll," I always get concerned about making sure that we (a) know where the employer/employee relationship is, and (2) if the company "running payroll" and the company for which it is run are, in fact, separate employers, that the IRS's payroll agent rules (found here: https://www.irs.gov/businesses/small-businesses-self-employed/third-party-arrangements) have been followed.

Assuming #1 and #2 are in fact separate employers and the employee in question is an employee of #2, and assuming they are not in a cg, or don't want #2 to adopt the plan, then the correction under EPCRS is to terminate the employee's participation and account, and distribute his/her contributions, if any, with earnings, to him/her as taxable income for the year in which distributed, and use the employer's money to pay admin expenses or fund other contributions. Whether you can self-correct or must make a VCP submission follows the regular rules for that.

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If #1 and #2 are separate 501(c)(3) organizations, whether a controlled group exists is only relevant for the employer contribution portions of the plan. Under 1.403(b)-5(a), employer contributions are subject to the same coverage and nondiscrimination rules as they would be in a 401(k). As quoted above, deferrals in a 403(b) are not. 

For deferrals, what matters is which organization(s) adopted the plan.  As quoted above, the universal availability requirement for deferrals applies separately to each 501(c)(3) organization.  If the correction allows the ineligible person from #2 to keep his/her deferrals in the plan, then #2 violated the universal availability requirement for salary deferrals for that time period.  Under EPCRS, if your correction causes the plan to fail some other requirement, the other failure must be corrected, too.  See Rev. Proc. 2016-51 6.02(d).  Unless they are prepared to make QNECs for the other #2 employees, the correction needs to be refunding the ineligible person's deferrals, with earnings. 

The rules for deferrals in a 403(b) are different than the rules for deferrals in a 401(k) and those differences will affect how you do the correction.

 

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that is correct.  the controlled group question relates to document provisions about employees of which entities are eligible to participate and do controlled group members have to adopt or participate etc.

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