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403(b) - ineligible employee fixes


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A plan sponsor was running payroll for another non-profit and allowed an ineligible employee into their 403(b) plan. Rather than doing a (relatively) simple correction, they'd like to try and recast the plan as a multiple employer plan. I don't even know if the prototype sponsor would allow them to do this. I guess my real question is would they have to refile 5500s for the years where the ineligible employee made contributions? Any other exposure on making this move?

Thanks. 

 

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Does the other non-profit have other employees?  The universal availability requirement for 403(b) deferrals applies separately to each entity that adopts the plan.  1.403(b)-5(b)(3).  If the plan is retroactively amended to allow one person from the other non-profit to defer, all of the other employees of the other non-profit will have to be brought in retroactively, too, unless they meet one of the allowed exclusions.  So, the retroactive amendment would be creating retroactive missed deferrals for any other employees. That can get expensive to correct.

It will probably be a much less expensive correction to distribute the ineligible deferrals.

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Thanks, Kevin. Yes, we think the other employees were all offered entrance , so we're not too concerned about universal availability. And yes, we suggested a simple self-correction with a distribution to the one ineligible. But hey, clients know better, right? I think that's where we'll end up, but wanted to see if anyone had insights on the direction they're asking about.

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Our pre-approved 403(b) document allows multiple employer plans. 

As for your 5500 question, the instructions say to file an amended return to correct errors in the original filing.  Would I file an amended return if the only change was, for example,  to increase the participant count from 40 to 45?  Probably not.  If the change was material, then I would definitely amend.

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