A tale of two employers...

[Guest jreddi]

Two state-funded universities merged in 1997 into a separate entity, while the original universities still had employees working exclusively for themselves. The non-merged employees were allowed to continue contributions to their own separate 403(B) plans administered by the universities; the merged employees were allowed to contribute to a separate 403(B) plan with an employer match (up to 5%).

The entity de-merged in 2000. The merged employees again became university employees no longer allowed to contribute to the entity's 403(B) plan, under the "same desk rule", but were once again allowed to contribute to their individual university's plans.

Now...comes the fun part.

Because of the de-merger, some employee's have over-contributed to the plan, exceeding the $10,500 for PY2000.

The dispute lies in who should refund to the employee the overpayment amount: the merged entity or the individual universities.

Both are claiming that the other is responsible, but, as the end of year looms mightily on the horizon, someone (one of the the entities) must come up with the funds so that the affected employees are not penalized for over-contribution.

Any thought on who is responsible for this?

[Guest Brent Rowell]

From your account it sounds like the contributions were sequential (merged first then University). If so, and if there was no violation prior to the University contribution I would think the previously merged entity has a strong argument. Most likely the employees failed to notify their "new" employer about other elective contributions they had made.

A second argument is that the University should have known better.

Brent

[rcline46]

Using the 401(k) rule, the EMPLOYEE tells which entity to return the money. I would doubt the 403(B) rules would be different. Of course, not being a 403b expert....

[Guest RJT]

It is the employee's choice. There is no centalized Plan Administrator under non-ERISA 403(B)'s, and the employer has no legal obligation even to refund such excesses. The failure to refund will not disqualify the 403(B) arrangements. Because the employer's obligation is only based upon it's withholding responsibility (that is, it must have a reasonable basis for reporting the deferrals as tax favored), it would be fulfilling this responsibility by notifying the employees of the excess. If the employee fails to withdraw the excess, the tax problem then is the employee's, not the employer's.

[Guest Brent Rowell]

I'm not an expert but do disagree. I think the employer is still responsible for witholding. I've seen employer's disclaimer forms but have yet to meet anyone who believes that these forms are valid.

[Guest RJT]

Brett, 403(B)s are fundamentally different from 401(a)s. They are premised (except for the discrimination rules)on individual tax liabilities and responsibility. I'm not sure why you disagree with my prior note, perhaps you could give a basis for it.

A 402(g) violation will not disqualify a plan, it will only cause an excess to be taxed. There is no statutory obligation on a 403(B) plan sponsor to return any excess. There is no statutory penalty on a plan sponsor for failing to return an excess. Under ceratin kinds of annuity contracts, the employer doesn't even have the right to force excesses out of contract without the participant's consent. The IRS admits that the only hook they have with the employer is the withholding tax obligation, and that the employer must have a reasonable basis for reporting a contribution as tax deferred. The Service has typically agreed on audit that employer instruction to the employee to take a return of the excess fulfills that obligation. This position is consistent with the 403(B) statutory scheme. Help me understand your disagreement.

[Guest jreddi]

I am still investigating the statutory requirements for employers, but I doubt they cover this territory.

This may be just a case of a person working for Gimbel's (if they could have had a 403(B), but for the sake of argument, let us say they did) for part of a year, then working for Macy's. I don't think either would have any statutory responsibility to monitor the contribution made to the other plan.

However, since this university remains paternalistic and since the merger and demerger were muddy at best, the university has decided to monitor this.

In a surprising development, the controlling body of the University system, which sets standards and policies for all the universities in its perview, has decided that they will handle the refunding of overcontributions.

Now, the question is....will it impact the employee is these overcontributions are not refunded to the employee within the tax year? I am thinking from my research: Most definitely, but I am open to your thoughts.

[Guest RJT]

It will impact the employee. But once the employer notified the employee of the problem, it will cause the employer no audit problem if the employee doesn't do what is necessary to have the excess returned. The tax liability is that of the employee if it is not returned.

Does the employee have a cause of action against the employer for any tax loss related to the failure of the employer to properly monitor and return excesses? Maybe, but the circmstances would need to be extreme.

[Guest Brent Rowell]

My argument is from the wage-withholding side, not 401, 402, 403.

My understanding is that an employer is required to withhold on wages. Exceptions exist for funds that meet the rules for salary reduction. Here we are talking about salary reduction amounts that exceed the rules. In my thinking (I'm not qualified to call it an opinion) the employer is responsible for withholding on the excess contribution. An IRS charge of failure to withhold is the potential by product of not "fixing" the excess elective salary reduction amounts.

[Guest jreddi]

Just so you know, gentlemen. A good reference for this is Publication 571. You can download it from the IRS website.

Thanks for your help.

[Guest Brent Rowell]

My argument in is somewhat stated on page 13 of publication 571 "Income Tax Withholding by Employer"

[Guest RJT]

I do not think we differ much.

Take a typical large public school district that has 20 or more 403(B) vendors. It is non-ERISA, and assume it is salary deferal only. Your reading would require that the school district have strict liability for any employee who did anything that jepordized the tax deferred status of any of the money in a 403(B) contract. Thus, if a teacher took out two loans exceeding the loan limits, took a hardship without a hardship, miscounted on the 402(g) catchup, or improperly applied two of the 415©limits throughout his or her career, the school district would be liable because they reported the deferrals as non taxable.

I think we both agree that the basis of employer liability is withholding, and that the Service itself has said. But the withholding liability has never been a strict liability, as you appear to be suggesting. Strict liability is a tough standard to apply where there are no tax code requirements that there be a plan administrator of a 403(B) plan- as there is for a 401(a); or where there are no requirements that plan level tax records be kept-as in a 401(a) plan; or where there is no taxability to a trust of income from a disqualified arrangement; or where there is no loss of tax deduction to an employer (which, under some circumstances, can be important to a tax exempt employer).

The basis for the withholding requirement is instead one of having a reasonable basis for the reporting of a contribution as being tax deferred. This means that the employer must take some reasonable steps and have made arrangements for some sort of reasonable compliance program at some level in order to reasonably claim the withholding was proper.

Do you disagree?

[Guest Brent Rowell]

We are in agreement. Your last paragraph is what I had in mind.