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Cutback changes to Non-ERISA 403(b) Plan


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A governmental non-ERISA 403(b) plan, with discretionary matching and nonelective contributions, wishes to make the following changes:                                                                                                                                                       1. Compensation is now defined a W-2 Wages with no exclusions.  Plan sponsor now wishes to exclude following from definition of compensation applicable to all contribution types:                                                                      a. All amounts deferred or excluded from taxable compensation under Code Section 125, 132(f)(4),                           402(g)(3), 402(h)(1)(B), 403(b), or 457(b)                                                                                                                                b. Deemed Section 125 compensation                                                                                                                                      c. Bonuses                                                                                                                                                                                      d. Overtime                                                                                                                                                                                      e. Commissions                                                                                                                                                                              f. Differential Pay                                                                                                                                                                            g. Safe Harbor Fringe Benefits                                                                                                                                                    h, All Post-Severance Compensation

2.  Plan currently allows participants to take distributions in the form of lump-sum, partial lump-sum, and installment payments.  Plan sponsor now wants to eliminate partial lump-sum and installment forms of distribution.

3.  Plan has a 6-year graded vesting schedule and provides 100% vesting if participant severs employment on account of disability.  Plan sponsor now wants to eliminate 100% vesting upon disability.

I am concerned that these changes would result in a cutback of benefits under 411(d)(6),

What do you think?

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Section 411 doesn't apply to a governmental plan.  See 411(e)(1)(A).

However, in many states, federal or state constitutional provisions on the impairment of contracts have been interpreted to prevent adverse changes to present or future benefits for current employees.  (This is actually a tougher standard than 411(d)(6), as it prevents even changes to future benefit accruals for such employees.)  You would therefore want to research court decisions in the relevant state.

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