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403(b) and Separate 401(a) Plan


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I work with some tax-exempt employers who offer a 403(b) plan and a separate 401(a) plan that matches the elective deferrals made to the 403(b) plan by some (not all) of the 403(b) plan participants.  

A question has come up as to whether the matching contributions to the 401(a) plan could be structured as 401(m) safe harbor matching contributions to satisfy ACP testing (assuming it passes 410(b) coverage testing).  In other words, the employer would sponsor an elective deferral-only 403(b) plan for all employees and a separate safe harbor match-only 401(a) plan for some of the 403(b) participants.

What do you think?

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I think this should work. 26 CFR § 1.401(m)-1(a)(2)(ii) provides that

Quote

An employer contribution made to a defined contribution plan on account of contributions made by an employee under an employer-sponsored savings arrangement that are not held in a plan that is intended to be a qualified plan or other arrangement described in § 1.402(g)-1(b) is not a matching contribution.

The clear implication is that an employer contribution made to a defined contribution plan on account of contributions made by an employee in a plan that is intended to be a qualified plan or other arrangement described in § 1.402(g)-1(b) is a matching contribution, even if the plan to which the employer contribution is made is separate from the plan to which the employee deferral is made.

In the context of governmental plans, it is common to have a 457(b) plan with matching contributions made to a 401(a) plan.  Obviously, this doesn't work in the private sector, because a private sector 457(b) plan can cover only highly compensated employees.  But it does reinforce the idea that matching contributions can be made to a plan other than the plan under which the employee made deferrals.

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3 hours ago, Carol V. Calhoun said:

I think this should work. 26 CFR § 1.401(m)-1(a)(2)(ii) provides that

The clear implication is that an employer contribution made to a defined contribution plan on account of contributions made by an employee in a plan that is intended to be a qualified plan or other arrangement described in § 1.402(g)-1(b) is a matching contribution, even if the plan to which the employer contribution is made is separate from the plan to which the employee deferral is made.

In the context of governmental plans, it is common to have a 457(b) plan with matching contributions made to a 401(a) plan.  Obviously, this doesn't work in the private sector, because a private sector 457(b) plan can cover only highly compensated employees.  But it does reinforce the idea that matching contributions can be made to a plan other than the plan under which the employee made deferrals.

Interesting.  If the contribution to the separate plan is a matching contribution as described in that provision of the 401(m) regs, then it should follow that it could be deemed to pass ACP if it satisfies the safe harbor provisions of 401(m)(11) (absent a provision to the contrary).

3 hours ago, John Feldt ERPA CPC QPA said:

If so, could/would the 403(b) plan be a “deferral only” plan, exempt from 5500 filing, is that also your question?

I would think the same analysis would apply to a deferral-only 403(b) plan that is exempt from ERISA; but the assumption in this case is that both plans are treated as an ERISA plans.

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I agree with Belgarath.  It is no longer possible to make a "Non-ERISA" Plan have a contribution relationship with an ERISA plan.  This arrangement will make the 403(b) ERISA.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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Just want to add a note.  Assuming your clients are 501(c )(3) and not government sponsors, the technique of using a 401(a) to provide matching for deferrals in a Non-ERISA 403(b) is old and now unacceptable.   It was usually used to try to avoid a large plan audit caused by a large Participant count due to universal availability in the 403(b).  The DOL "squashed" this idea in DOL Advisory Opinion 2012-02A.  So your clients who did this and have not corrected it in any way each now have two ERISA plans, each one with a 5500 filing requirement, etc.  If they have not been treating these 403(b) plans as ERISA, I would suggest that they have bigger problems than whether the match can be Safe Harbor.

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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Sorry for the additional addition!   If these plans are as I suspect (supposed Non-ERISA 403(b) and a 401(a) containing the match), there are two ways to go to avoid filing 2 5500's in the future:

1. If the Participant/ Employee count is not a problem (large and at or close to large plan filer status), I would amend the 403(b) and put the match in it and terminate the 401(a).  It is not possible to merge the 401(a) and the 403(b), so the 401(a) assets will be 100% vested and paid out, if that is what the plan says.  Participants can, of course, roll such assets into the 403(b).

2. If the Participant count is a problem, perhaps an answer would be to amend the 401(a) into a 401(k) so that you could use a service eligibility (1 year wait?) and terminate the 403(b).  It is possible to terminate a 403(b) but may not be easy.  It depends on what kind of contract the assets are in and how many accounts there will be to disburse.

3. If the 403(b)s in this question have not filed 5500's, I suggest a strategy call with the client's ERISA attorney.

Hope this helps.  Let me know if you have other questions.

PNJ

Patricia Neal Jensen, JD

Vice President and Nonprofit Practice Leader

|Future Plan, an Ascensus Company

21031 Ventura Blvd., 12th Floor

Woodland Hills, CA 91364

E patricia.jensen@futureplan.com

P 949-325-6727

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20 hours ago, Belgarath said:

Maybe I'm misunderstanding the question, but in DOL Advisory Opinion 2012-02A, the DOL said that making the matching contribution to another plan would cause the 403(b) plan to be an ERISA Title I plan.

It was a bit of a tangent, but good catch on the matching causing the 403(b) plan to lose its non-ERISA status.  I forgot about that.

The question was really about whether matching contributions to a 401(a) plan could satisfy the ACP 401(m)(11) safe harbor if the contributions are based on deferrals to a separate 403(b) plan, where all employees are eligible to participate in the 403(b) plan, but only a subgroup of employees are eligible for the 401(a) plan (assuming it passes coverage testing). 

Both the 403(b) and the 401(a) plan are ERISA plans in this scenario and 5500 filings aren't an issue (assume they audit and file for both). So not so much an ERISA question and more a 401(m) question.

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I don't think it works.  Treas. Reg. 1.401(k)-3(c)(1) requires a safe harbor match to be made on behalf of each eligible NHCE.  I know you don't care about meeting the 401(k) safe harbor rules, but that requirement is incorporated into the 401(m) safe harbor rules.  See 1.401(m)-3(c).  Providing matching contributions to only some of the NHCEs cannot be a safe harbor match.

Now, there are a couple of exceptions if one can disaggregate the 403(b) plan into multiple "plans" such as union v nonunion or < age 21 or < 1 year of service versus those above those thresholds.

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On 4/26/2021 at 2:43 PM, MWeddell said:

I don't think it works.  Treas. Reg. 1.401(k)-3(c)(1) requires a safe harbor match to be made on behalf of each eligible NHCE.  I know you don't care about meeting the 401(k) safe harbor rules, but that requirement is incorporated into the 401(m) safe harbor rules.  See 1.401(m)-3(c).  Providing matching contributions to only some of the NHCEs cannot be a safe harbor match.

Now, there are a couple of exceptions if one can disaggregate the 403(b) plan into multiple "plans" such as union v nonunion or < age 21 or < 1 year of service versus those above those thresholds.

Right, that is the question -- does "each eligible NHCE" as used int the safe harbor regulations refer to the NHCEs eligible for the 401(a) plan or for the 403(b) plan?

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