oldman

The governmental 457 plan covers most employees and provides participants opportuntity to rollvoer monies to another elgibile retirement plan or IRA. Converting to a top hat plan would only cover a select group of management or HCEs and participants would not be allowed to take advantage of the rollover option. Best to termiante the existing plan and establish a brand new tax exempt 457 plan.

401(k) plan failing ADP/ACP test. 401(k) plan provides for a match of 50% of elective deferrals up to 3% of their compensation. Propose excluding HCEs from 401(k) and setting up 403(b) for HCEs only with nonelective contribution in an amount of 1.5% of compensation (equivalent to matching contriubtion made under 401(k)). 403(b) excludes employees participating in 401(k), so NHCEs excluded from 403(b. 401(k) - ADP, ACP, and Coverage testing not required, but 415 and Top Heavy necessary. 403(b) - Coverage not required, but 415 is. Is the proposed arrangement correct?

A church, as defined under §3121(w)(3)(A), sponsors a 403(b) plan. An affiliated tax exempt 501©(3) organization (not treated as a qualified church-controlled organization) wishes to participate in the plan. I have concerned about the related employer being treated as a single employer under the plan. However, I think it would be permissible under the Permissive Disaggregation rules. It is my understanding if two more entities make contributions to a church plan as defined in code §414(e), the controlled group rules may be applied separately to the entities that are churches and the entities that are not churches. What do you think?

Attached McKay Hochman provides good information on Davis-Bacon plans. "Davis-Bacon Prevailing Wage Retirement Plans Sample Prototype Plan News Article October Rev. 11/01/02 -------------------------------------------------------------------------------- Most of the mystery surrounding Davis-Bacon plans is caused by the fact that the requirements of this type of plan design are found in the Davis-Bacon Act not the Internal Revenue Code or ERISA. Additionally, Davis-Bacon compliance is monitored by the wage and hour division of the Department of Labor and not the Pension and Welfare Benefits Administration nor the IRS. To provide some historical perspective, the Davis-Bacon Act was signed into law in 1931 to prevent the federal government from reducing local area construction wages. The Act was amended in 1935 to establish a system of setting wage rates in advance of the contract bidding. In 1964, it was amended to include fringe benefits as a component of the overall prevailing wage. In general, the Davis-Bacon Act requires any contractor bidding on a government construction project in excess of $2,000 to pay workers at a “prevailing union wage”, even if the employer did not employ union members. In general, the prevailing wage is based on area union wages and fringe benefits. Thus, prevailing wage compensation can be broken down into two components - the prevailing hourly wage and the prevailing hourly fringe benefit amount. Davis-Bacon prevailing wages must be paid to affected employees unconditionally and not less often than once a week. The prevailing wage fringe benefit component is intended to take into account fringe and welfare benefits, such as health insurance, which are paid to union construction workers. Under Davis-Bacon guidelines, the fringe benefit amount can be paid as cash wages. However, pursuant to Revenue Ruling 75-241, if the fringe amount of the compensation package is paid to the worker as cash compensation, it becomes subject to FICA and other payroll taxes as well as for purposes of determining workers compensation premiums. Despite the additional tax liability to both the contractor and the employee, contractors frequently pay the fringe wages in the form of compensation. In some areas, this is necessary in order to get qualified workers, in other instances contractors claim it is just easier. Through a combination of attractive plan design and good communication, a Davis-Bacon plan could be just as easy and just as attractive, if not more attractive than payment in cash. From a practical perspective, there are certain plan features that coordinate better with the prevailing wage guidelines. In general, the Davis-Bacon portion of a retirement plan must provide for immediate eligibility and full and immediate vesting. Absent immediate eligibility, the Davis-Bacon fringe would need to be paid as compensation until such time as the individual becomes eligible. Full and immediate vesting is required because, unlike a traditional qualified plan, in a Davis-Bacon situation, the contributions are in lieu of actual cash wages due to the participant. Thus forfeitures cannot inure to another employee, nor can they be used to offset future plan contributions. Contributions are required to be made not less often than quarterly, this differs from both the rules that apply to 401(k) elective deferrals as well as other employer contributions. In addition, the plan design can not require a requisite number of hours of service or last day employment. Davis-Bacon plans are not subject to the multiemployer rules; since the employment relationship is not governed by a collective bargaining agreement. Therefore, it becomes essential to keep complete and accurate records of all Davis-Bacon hours. Because of the tenuous nature of construction work, one area of particular concern in a Davis-Bacon plan is when does a separation from service occur? A worker may be laid-off for a period of time and then re-employed during the construction season. There are no clear cut guidelines as to when a separation of service occurs in this respect, therefore care should be taken to make sure that all participants are handled in the same manner. To the extent that the contractor knows that the employee will return after a lay-off they should probably be treated in the same manner as seasonal employees as opposed to a terminee. This is certainly the case if the contractor pays for any benefits during any lay-off periods. Prior to EGTRRA, a common issue in Davis-Bacon plans was Internal Revenue Code Section 415 violations. This happened based on the fact that the contribution to the plan was based on the difference between prevailing wage rates and a participant’s normal pay and benefit rates and how much time they spent performing covered prevailing wage service. Unlike a traditional retirement plan where annual additions can be held as suspense and/or reallocated to other participants, if a Davis-Bacon participant incurred an annual addition violation, that amount would need to be paid directly to the participant outside the plan. This results in additional taxable compensation and additional payroll taxes to be paid by the contractor. Thankfully, the increased 415 annual addition limitation will prevent most annual addition violations, although special care should be taken to avoid deduction violations under Code Section 404 which is limited to 25% of compensation. One area that remains problematic for Davis-Bacon plans is coverage and nondiscrimination testing. All of the 401(a)(4) nondiscrimination rules apply to Davis-Bacon plans. In some cases Davis-Bacon amounts can be helpful when doing the general test. This would be true in a cross-tested plan where non-highly compensated employees receive significant Davis-Bacon contributions that can be used as the allocation gateway as well as for all or a part of the cross-tested benefit. Remember, however, that Davis-Bacon prevailing wages may apply to an owner or other highly compensated employee working in a non-managerial role. To the extent that an HCE receives a significant Davis-Bacon contribution, this can cause the plan to fail nondiscrimination testing. Remember any corrective methodology used to pass a failed discrimination test can not result in the Davis-Bacon employee forfeiting any of his or her Davis-Bacon contributions. The definition of HCE is based on the prior plan year compensation. It is very important to identify all HCEs carefully. The volatile nature of the construction industry could result in discrepancies in the HCE group from year to year. Despite the attractiveness of a Davis-Bacon plan, some contractors may argue that they simply must pay the fringe benefit amount as compensation in order to retain good workers. In those cases a plan designed with liberal withdrawal rights and loans could serve double duty. The Davis-Bacon contributions could serve as the foundation for some aggressive plan design that benefits the owners, while the Davis-Bacon workers benefit, especially during lay-offs by loan and hardship withdrawal provisions. Davis-Bacon plan design and administration can get complicated because the plan and its operation must remain in compliance with both the Internal Revenue Code and the Davis-Bacon Act, however, once you are familiar with the potential pitfalls the administration is rather straightforward. To learn more, call 973-492-1880 or e-mail info@mhco.com. © 2011, McKay Hochman Co., Inc. All rights reserved."

John - Thanks for the feedback. I agree that at a minimum the plan sponsor needs to adopt an EGTRRA compliant document inclusive of final 415 regulations. Plan will also need to be updated byt he end of the 2011 plan year to comply with PPA.

What are the ramifications of a governmental entity not adopting an EGTRRA compliant 401(a) document by January 31, 2011? Would they be considered a nonamender and remedy the plan defect by submitting an EPCRS filing?

An age 59-1/2 distribution was erroneously processed from a money pruchase plan. Request was made for participant to return distriubtion amount plus earnings, but participant refused. To make plan whole, employer would then have responsibility to restore funds to plan. Such monies would then be placed in forfeiture account to be applied as a credit towards future contributions. At first , it appeared that this would be a windfall for employer, but in making contributions to plan, employer would not be claiming deduction on the restored monies. For example, restored amount in forfeiture account equals $10,000, employer required to make contribution of $100,000, so employer submits net deductible contribution of $90,000. (Note plan's normal retirement age is 62, so classifying the withdrawals under the new NRA rules wouldn't apply) Would this correction be appropriate in remedying the situation?

A municipality let go about 30 employees in July 2009. These employees sued for wrongful termination and won. Now municipality has to reinstate them as if they never left and pay them for all the back pay. Of those that were contributing to 457(b) deferred compensation plan, nine took lump sum distributions and one set up installment payment distributions. Is plan required to restore participant accounts by allowing participants to payback distributions and adjust for any gain/loss? Also, would plan be required to withold for pre-tax elective deferral contributions from the judgement award of back pay?

Section 1.403(b)-5(b)(1) provides "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 electiopn..." I am more disposed to take a more conservative approach in that the intent was for all employees be given the opportuntiy to defer in a reasonable period of time, i.e., first payroll period following date of hire. However, the plan sponsor determined that the quarterly entry dates complies with the regulation and absent any guidance from the IRS on this matter, this provision was implemented.

I had a plan that established quarterly entry dates for employees wishing to defer their compensation. This would be allowed because Section 1.403(b)-5(b)(2) provides that "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". Note that effective availability is one requriement under universal availability. A plan may provide for effective availability and still fail the universal availability rules.

Good commentary on this subject by assetinternational.com: No, if the plan is a governmental plan. Section 410(a) does not apply to 403(b) plans, only qualified plans such as 401(a) plans. However, there is a similar section of ERISA (202(a)) that applies to ALL ERISA plans, whether qualified or 403(b). Thus, 403(b) ERISA plans are generally restricted to a one-year waiting period and an age requirement of 21 in order to be eligible for employer contributions, or two years if 100% immediately vested in employer contributions as you describe. There is also a more obscure exception that extends the age requirement to age 26, but only for educational institutions where vesting for employer contributions is 100% immediate, though in this case the service requirement cannot be extended to two years. But none of these restrictions apply to governmental or non-electing church plans, since the are not subject to ERISA and neither ERISA Section 202(a) nor Code Section 401(a) applies to them. Thus, the five-year waiting period for employer contribution in your example is an acceptable plan provision. You should keep in mind, however, that the universal availability requirement of 403(b) applies to all ELECTIVE deferrals in governmental plans, so eligibility to make an elective deferral is immediate for all employees, with limited exceptions.

As part of the Omnibus Reconciliation Act of 1990 ("OBRA"), as an alternative to the payment of FICA taxes, state and local governments may establish a retirement program to cover part-time, temporary or seasonal employees. In order for an employer to avoid FICA tax liability, its FICA alternative plan must satisfy certain design and benefit requirements. A FICA alternative plan: must provide a benefit of at least 7.5% of compensation; contributions must be credited with a reasonable rate of interest benefits must be 100% nonforfeitable. A question has come up whether these type of arrangements may allow participants to invest in variable funds and permit loan distributions. Based on Treas. Reg. §31.3121(b)(7)-2(e)(2)(iii)©, variable investments would not provide a reasonable rate of interest and would conflict with providing a benefit comparable to an OASDI Social Security benefit. The practical approach would be to offer only a fixed investment (i.e., stable value fund) as the only investment option. There is no explicit reference in the regs prohibiting loans. It is implicit in the nonforfeitability requirements of the regs that require a covered participant to be "unconditionally entitled to a single-sum distribution from the retirement system equal to 7.5 percent of the employee's compensation over the period of covered service, plus interest." Hence, there should be no access to the funds before termination of employment, retirement, death or disability. It would follow that such plans would not allow for in-service withdrawals on account of a serious financial, attainment of age 59-1/2, or loan distributions. What do you think?

A fire district established a FICA alternative plan paying 7.5% of compensation for all eligible participants. To comply with Section 3121(b)(7)-2, contributions are invested in a fixed investment (no variable investments) and benefits must be 100% nonforfeitable. The employer wishes to add an additional employer contribution of 7.5% of compensation subject to a vesting schedule and invested in separate account options allowed under the group annuity contract. Are there any issues the employer faces in adding this additional contribution to the FICA alternative plan?

In addition to the annual matching contribution made on behalf of employees contributing to the employer's 457 plan, a governmental 401 plan provided for a one-time employer non-elective contribution for the 2004 plan year. The plan was restated effective 1-1-2009 and continued to provide only for employer matching contributions. However, following the 2004 plan year, the employer continued to make non-elective contributions and wishes to make this a permanent feature. To remedy this operational defect, should the employer submit through VCP a retroactive amendment effective 1-1-2004 for the inclusion of the non-elective contribution?

Is it possible to have a multiple employer governmental 457 plan? For example, numerous municipalities wish to consolidate their benefits and regionalize for purposes of 457(b) plan sponsorship. How would such a plan be structured? Would it be suffice to have one plan document and each adopting employer execute a joinder agreement signifying their adoption of the plan identifying any plan provisions that deviate from the standard plan structure? Other than monitoring the deferral limits, are there any compliance and recordkeeping issues that would need to be addressed?

Thanks 30Rock!

A follow-up question, if you please. Would terminating the 403a program present the same obstacles as terminating a 403(b0 plan? That is if the plan contains individual annuity contracts, the employer probably would have no control or authority to liqiudate the assets for distribution. Therefore, the assets may not be distributed as soon as adminstratively practicable after termination of the plan and not be eligible for eligible rollover treatment.

Thank you both for your prompt response.

My understanding of 403(a) arrangements are as follows: -A qualified plan funding only through annuities -Funded solely by employer contributions -Must have independent investment advice. Questions: Do these arrangments require a plan document? Form 550 annual reporting required? Can a 403(a) convert to a 401(a) plan?

Here is a response from David Powell at Groom. "First, note that many church organizations are not employers eligible to maintain a 457(b) plan. See Code section 457(e)(13). Only tax exempt organizations which are NOT churches or qualified church controlled organizations under Code section 3121(w)(3)(A) and (B) (usually, church hospitals, colleges, universities and nursing homes) may maintain 457(b) plans. Because such plans are exempt from ERISA as church plans, they need not be top hat. But if funded, they will run afoul of the constructive receipt/economic benefit rules and will be immediately taxable to the participants. Consequently, most use, at most, a rabbi trust where the assets are exposed to creditors of the employer. And they do not get the benefit of the rules applicable only to governmental plans, so no age 50 catch-up, no loans, and distributions are not eligible rollover distributions. They are essentially like other tax exempt organization 457(b) plans, just not limited to the top hat group."

I an not familiar with 403(a) plans and appreciate our comments. It is my understanding that these plans are funded solely by employer contributions and thus are ERISA qualified arrangements. Do these plans requrie a plan document? Can monies from these plans be transferred to a 403(b)plan? Can the 403(a) be converted to a 401(a) plan?

I am copying a response to this issue from from Mike Webb of Cammack LaRhette Consulting. "It is interesting there is no reference to leased employees in the final 403(b) regulations. Thus, we need to look to Code Section 414(n) as your describe. Though 414(n) does indeed treat leased employees as common law employees after satisfying certain statutory requirements, including the performance of services on a substantially full time basis for the recipient of at least one year and performance of such services under primary direction and/or control by the recipient, 403(b) is not listed among the myriad of Code sections to which such treatment applies. Thus, absent definitive future IRS guidance to the contrary, it would appear that the leased employee rules do not apply - instead, the general common law, facts and circumstances test applies to determine if the workers in question are employees of the plan sponsor, at least for purposes of the universal availability rule of Code section 403(b)(12)(A)(ii). We note that there are some older, pre-final regulation private letter rulings that indicate in their facts that leased employees as defined in Code section 414(n) could be excluded from 403(b) plan participation, but it is not clear those continue to be the view of the IRS, and they cannot be relied upon by other taxpayers in any event. Also, note that there is one type of non-employee that can participate in a 403(b) plan - a minister, under Code section 414(e)(5)."

The regulation governing this states that a facts and circumstances test is applied to determine whether a suspension of benefits has occurred, in which case vesting is not required, or a complete discontinuance of contributions has occurred, whcih requires vesting. Treas. Reg. §1.411(d)-2(d). I was unable to find any further published IRS guidance on this issue. I suggest one look at the larger picture, of what is involved with the contribution "freeze", i.e., the facts and circumstances. If it is part of a documented program to eventually lead to a plan merger or restructuring of the plan, then one can argue that it is a suspension. If it is being dione soley to avoid further benefit accruals until a decision is made on what to do with the plan, then it is probably is a complete discontinuation of contributions. Of course, this is a legal judgement that the plan sponosr msut make after consulting with its counsel.

For PPA, a plan sponsor may amend the plan to allow for unforeseeable emergency distribution, other than the participant's spouse or dependent. No other PPA provisions are necessary. Non-governmental 457(b) plans must be amended for PPA by the end of the plan year beginning on or after 1/1/09. Under HEART plans have the option of treating a participant who becomes disabled while performing qualified military service that would be provided under the plan had the participant resumed employment with the employer and then died. HEART also provides plans the option of treating differential pay as compensation for contribution purposes. The only other HEART provision affecting non-governmental 457(b) plans under HEART regards differential wages. Differential military pay is defined in Code section 3401(h)(2), and in general is pay that participants would have received had they continued in employment with the employer for their military service. For plan years beginning after 12/31/08, the differential military pay will be considered compensation under 457(b) plans. Participants receiving differential military payments are still eligible to take distributions form the plan (as a terminated employee), but cannot make contributions for a 6 month period followjng any distribution. Non-governmental plans must be amended for HEART by the last day of the first plan year beginning on or after 1/110. WRERA suspended 2009 requried minimum distriubtions (RMD) provisions - and the suspensions affected 457(b) plans. Amendments for thsi provision of WRERA are due no later than the last day of the first plan year beginning on or after 1/1/11.

Thanks. At least there are viable options for the plan sponsor to consider.