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403(b) Plan Compensation Issues

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We have a 403(b) plan that excludes commissions and bonuses for deferral purposes.  Is there any nondiscrimination testing involved or is this okay?  Thanks.

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The easy answer is probably yes if excluding bonuses and commission pass 414(s) testing, no participant is allowed to defer bonuses or commissions, and every participant has an effective opportunity to defer the max (e.g., enough base salary to defer the max).      

 

 

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Deferrals in a 403(b) are subject to a Universal Availability requirement [see 1.403(b)-5(b)] that includes an effective opportunity requirement. If excluding bonuses and commissions from deferral compensation makes it where someone doesn't have the opportunity to defer the maximum amount, you have a problem.  If the excluded amounts are significant, I would expect it to be a problem at some point.  The regs specifically say it applies to part-time employees.  It could also be a problem with someone who terms early in the year. 

Quote

1.403(b)-5(b)(2) Effective opportunity required. For purposes of paragraph (b)(1) of this section, an employee is not treated as being permitted to have section 403(b) elective deferrals contributed on the employee's behalf unless the employee is provided an effective opportunity that satisfies the requirements of this paragraph (b)(2). Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections. A section 403(b) plan satisfies the effective opportunity requirement of this paragraph (b)(2) only if, at least once during each plan year, the plan provides an employee with an effective opportunity to make (or change) a cash or deferred election (as defined at §1.401(k)-1(a)(3)) between cash or a contribution to the plan. Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)-4(c) (including any permissible catch-up elective deferrals under §1.403(b)-4(c)(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees. An effective opportunity is not considered to exist if there are any other rights or benefits (other than rights or benefits listed in §1.401(k)-1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or indirectly) upon a participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract.

 

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Hi Kevin - certainly this position is safe and unassailable. However, I've seen a lot of plans that, as long as they pass 414(s), do exclude bonuses, overtime, etc.

One could argue that the regs don't actually preclude this - in other words, you can defer "eligible comp" up to the limits in 1.403(b)-4(c), and this doesn't violate the requirement.

Sal has a reference to the 2010 ASPPA Conference where (in a Q&A session - not allowable as formal guidance, I know) the IRS suggested that it was ok as long as it passed 414(s) testing.

Have you, ar anyone, had this issue addressed upon audit, and if so, with what results?

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6 hours ago, Kevin C said:

 If excluding bonuses and commissions from deferral compensation makes it where someone doesn't have the opportunity to defer the maximum amount, you have a problem.  If the excluded amounts are significant, I would expect it to be a problem at some point.  The regs specifically say it applies to part-time employees.  It could also be a problem with someone who terms early in the year. 

 

I am curious if the IRS itself has made this argument at some point.

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