J Simmons

Hi, Mr. Kite. Treas Reg § 1.403(b)-10(a)(1) provides (bold added): What about not fully-paid annuity contracts? What steps must the ER take to 'deliver' a fully-paid annuity contract? Is notice from the ER to the annuity contract issuer and the EE that the ER is disclaiming any further power over the annuity contract and that the issuer may treat the EE as having all indicia and powers of ownership of the annuity contract enough? Does the ER have to have in hand and physically deliver the annuity contract to the EE? And why are whatever mechanical steps are necessary to deliver (and thus 'distribute') a fully-paid annuity contract not sufficient to 'distribute' a 403b7 custodial account?

I quite like the new term you coined, Architectspeak. Some ERs (the more proactive ones) have 'group' 403b7 custodial agreements, somewhat similar to a group annuity contract. Under a group 403b7 custodial agreements, the ER typically has certain contractual rights that the ER may unilaterally exercise including to direct payout. If so, the ER has the legal right to effect payout incident to termination. On the other hand, many ERs have taken a more conduit-only approach to the involvement of their payrolls in merely accommodating EEs that wanted to make pre-tax contributions to 403b7 custodial accounts. In such situation, the EE has to make his own separate arrangements with a custodial institution of his choosing, to set up a 403b custodial account. Typically, the only two contracting parties to such a custodial agreement are the EE and the custodial institution. There is mention of the ER, such as limiting contributions to remittances received by the custodial institution directly from the ER, but the ER has few if any contractual rights. As plan termination was not a concept known to the 403b world prior to the new regs, many such custodial agreements did not provide for payout incident to when the ER might 'terminate' its 403b plan. The 403b statute has for years if not all along presumed that the 403b product would be purchased by the ER for the EE. So some of the individual 403b7 custodial agreements were drafted to reflect that the ER was the purchaser, and bestowed some contractual rights on the ER. Here is where we end up in the quagmire of Architectspeak. You are correct that Treas Reg § 1.403(b)-10(a)(1) does not set out a time frame for the payout to be 'administratively practicable'. That reg merely provides that "n order for a section 403(b) plan to be considered terminated, all accumulated benefits under the plan must be distributed to all participants and beneficiaries as soon as administratively practicable after termination of the plan." Architectspeak at other forums during the last 12 months includes the notion that the 12-month period that applies for payout of benefits incident to the termination of a 401a QRP applies also to the payout period for terminating 403b plans. In section 8.3 of the model 403b plan language attached to Rev Proc 2007-71, the model language provides (emphasis supplied): In Architectspeak, this means that an ER with individual agreements in its 403b program may only terminate the 403b plan if all the individual agreements permit payout by reason of plan termination by the ER. I think it is equally a plausible interpretation to be applied to the bolded phrase above in the model 403b plan language that contracts that permit payout incident to an ER terminating its 403b plan will be distributed and those contracts that do not will pay out on their own terms. Is the "subject to any restrictions contained in the Individual Agreements" a qualifier of the ER's practical ability to terminate the 403b plan (Architectspeak) or a qualifier on the operative portion of that sentence, "all accounts will be distributed" (not Architectspeak)? FWIW, I did not include the bolded phrase in the 403b documents I drafted because of that vagueness.

Mark, Your description of the tax impact appears to be a correct understanding, assuming that the owners/partners are really owners/C Corp shareholders rather than true partners. The tax exclusion however is not only of the value of the coverage but also the value of the health expenses paid out. That could create significant amounts of taxable income for the owners/partners. Your post suggests that this is a single-employer situation. As such, the self-insured health program might be exempt from state insurance regulation and registration requirements, if ERISA applies. Extending coverage to those who are not legally wed spouses or dependents of employees might of itself take the self-insured program out of ERISA preemption and thus subjecting it to state insurance regulation and registration requirements. You ought to vet that concern out, and get a legal opinion before extending coverage in the way you suggest. Perhaps Ohio registration and regulation as a 'health insurer' is manageable, but then maybe it is not and would be a deal-killer.

As Bob Architect has repeatedly pointed out, under those individual 403b7 custodial agreements between the custodial institution and the employee, the employer usually does not have the unilateral legal authority to order that distribution from the 403b7 custodial account be made. If each and every custodial institution and each and every employee will agree in advance and give the employer that legal right to order distribution out of the 403b7 context incident to the employer terminating the 403b plan, then the employer can proceed to terminate its 403b plan. In that instance, the employer has greater assurances that ALL the 403b plan assets will be paid out/rolled over within an administratively reasonable period (e.g., one year or less). Since the active employees that are under age 59 1/2 need plan termination as an 'access event' so that they may have eligible rollover distributions and thus can rollover to IRAs, qualified plans, etc., an employer with a 403b plan funded through individual 403b7 custodial agreements needs the assurance that it has the legal authority to order the payouts incident to termination. Otherwise, those active employees under 59 1/2 and their custodial institutions that 'think' there is a valid termination in process and attempt a rollover would face premature taxation of the benefits for improper rollover contribution if even one individual 403b7 custodial agreement of a fellow employee remains in the 403b context a year later. If there are back-end loads or other investment or account termination or transfer charges related to the individual 403b7 custodial agreement, the EE might to leave his retirement savings in the 403b7 context and not roll to an IRA. Some financial institutions will not do that in kind, or even if they will, will charge the EE's account, despite the assets remaining with them and otherwise in the same investments but now in the context of an IRA. One such 403b vendor is NEA Valuebuilders. The IRS, including Architect, have yet to define which 403b contracts are "included" in an employer's 403b plan. This is particularly important to the ability to terminate, and knowing which individual 403b7 custodial contracts must be lined up in advance of attempting to terminate the 403b7 plan. One disconcerting comment made by Architect yesterday was that if an ER takes the minimalist approach and merely swaps name and contact info with a vendor that has any 403b contracts to which $ has been sent from 2004-2008, that vendor's 403b contracts to the EEs of the ER are "in the new, shiny plan". See Q&A 2 in Post #1 above. That suggests that such 403b contracts are part of the 403b plan's assets, further complicating the ability of the ER to terminate the 403b plan.

Thanks, Appleby and Larry. The case of Rowell v CIR, TC Memo 1988-410, 56 TCM 11 (1988), gives me heartburn on this one. The only case that I could find that allowed for a properly instructed transaction that was carried out wrong to be considered properly done was a botched direct transfer of a plan from one bank to another. In Doing v CIR, 58 TC 115 (1972), the Tax Court found no problem and the IRS has acquiesced. Problem is, Rowell is much closer factually to the OP.

Yes, or said another way, in running the 55% test you take into account those CBA EEs that are in a DCAP. You do not exclude them from the 55% testing just because they are CBA EEs and dependent care assistance benefits were the subject of good faith bargaining leading to the CBA. To exclude the CBA EEs from the 55% testing, dependent care assistance benefits must have been the subject of good faith bargaining leading to the CBA and the CBA EEs not in a DCAP.

Hi, jpod, When advising clients with qualified plans, I usually follow the expanded guidance in Treas Reg § 1.410(b)-6(d) and § 301.7701-17T.

Bob seemed optimistic that before year's end there would be some additional guidance on the plan document effective date. Given that we are T-minus 27 days, this is starting to look like a game of chicken. How much longer will those ERs without a 403b plan document sweat it out and see if the IRS blinks? My 403b clients are already all documented up, given the schedules of monthly board meetings and advance agenda and document posting before taking action. Notice, Larry, I didn't answer your question. Betting man? 3:2 odds right now that the IRS will blink before 1/1/2009. Going into the phone seminar today, I was down around 3:1 against it happening. Oh--did I say I wasn't a betting man?

BOB ARCHITECT, 12/4/2008: Stay tuned over next 2 to 3 weeks for further guidance re 1/1/2009 effective date regarding requirement for written 403b plan document and perhaps a RAP (remedial amendment period). New control group rules for tax exempt entities take effect 1/1/2009, and apply to all employee benefit plans sponsored by such entities, including 403b plans. Rev Proc 2007-71 with "model" plan language for use by public schools, "sample" plan language for other 403b eligible employers. There will be no further model/sample plan language to address any other issues, such as employer contributions. IRS is prepping a 403b prototype plan document program (expected sometime in 1st half of 2009), and a determination letter program for individually designed 403b plan documents (later). The IRS will publish 65-70 pages of suggested language, first for the prototype plans and then for individual designs, as part of a Rev Proc--hopefully in the next few weeks (hopefully before the end of 2008). Such will address Roth deferrals and tax-exempt orgs structuring non-elective matching and non-matching contributions from the ER. There will be a 45 day public comment period. EPCRS (Rev Proc 2008-50) will be updated for 403b plans, for failures to comply with the new 403b regs taking effect 1/1/2009. None of the current EPCRS procedures apply to failures re the new 403b regs. MYTH BUSTING: MYTH #1: Info Sharing Agreement-if ER doesn't have an ISA in place with the vendor of an EE's 403b contract, the 403b contract will be taxable or subject to other problems. ISAs only appear in one reference in the new Treas Reg § 1.403(b)-10, in addressing 90-24 in-service, under age 59 1/2 exchanges. Only a 403b plan that permits such exchanges would need any ISAs from vendors approved to receive such exchanges. Section 6.04(a)-(d) of the model plan language (Rev Proc 2007-71) is an example of in-service exchanges. A 403b plan need not allow such in-service exchanges. If a 403b plan does not, then that 403b plan needs no ISAs. Treas Reg § 1.403(b)-3(b) allows a 403b plan document to specify the allocation of compliance responsibilities. The ER can infuse such allocation language in an ISA, but it could be by other agreements and documents. MYTH #2: If an ER is parsing down the # of vendors incident to its compliance efforts, some 'approved' vendors are sending EEs letters that they must exchange their 403b contracts to an 'approved' vendor by 12/31/2008 or else their 403b contracts will be taxable. Truth: Only future contributions need to go to an 'approved' vendor to avoid income taxation. MYTH #3: Public schools (K-12 and public colleges, universities) will become ERISA fiduciaries and must file f5500s. Truth: State or local law, possibly, but not under ERISA. MYTH #4: An ER that freezes contributions (not terminate the plan) does not need a written 403b plan. Truth: A written 403b plan document is needed for a 403b plan on the effective date of the new 403b regs. This is true even if the 403b plan has only previously accepted salary reductions. MYTH #5: The 403b regs restrict EEs' right to rollover their benefits. Truth: In-service exchanges are now limited (as 90-24 exchanges were made obsolete by the new 403b regs), but rollovers following an access event remains the same. MYTH #6: Treas Reg § 1.403(b)-11, delayed effective dates apply to any church or to any public school with a CBA. Truth: the only time a church 403b plan effective date only is delayed if the 403b plan is a product of a church "convention" (not for independent churches). Only public schools with a CBA in place on 7/24/2007 that called for the maintenance of the 403b plan by the public school get the delayed effective date. LOOMING PITFALLS Adopting 403b plan document. Memorializing in writing the formulation or putting into effect the plan. There needs to be language and signatures by which the ER adopts the plan document. Bad Terminations. For the first time, the new 403b regs describe favorable tax consequences of terminating a plan 'if you can go down that road'. Plan termination is administratively and timely liquidation and distribution of all plan assets. Problem for 403b plans with individual custodial accounts (403b7 accounts): the ER is not in a position to require the payout of the assets held in those custodial accounts. The ER may have no power to force the payout, and ALL of the plan assets must be liquidated/distributed in order to terminate the 403b plan. What is the favorable tax consequence of being able to terminate a 403b plan? It makes eligible for rollover the 403b contract benefits of those active employees under age 59 1/2. If you cannot terminate, those active employees under age 59 1/2 may not roll their 403b benefits outside the context of a 403b contract. Section 8.03 of the model plan language (Rev Proc 2007-71) reflects this reality that termination is subject to the terms of the individual 403b contracts. 'Your structure of 403b plan may not permit you logistically to pursue a termination.' The big 403b unique advantage: 403b permits the ER to make non-elective ER contributions into a former EE's 403b contract for five years after employment terminated, up to the 415c limit (e.g., $49,000). This must be non-elective by the EE. E.g., EE cannot receive such contributions in lieu of unused vacation pay at the time of termination. That would be a cash or deferred election by the EE, and that is not possible to do so post-employment. The 5-year provision is limited to non-elective, ER contributions. Q&A: #1: Large ERISA plans are subject to audit. #2: SD has 4 vendors, not going to use any of the 4 after 2008. Going instead with a new vendor for 2009 and beyond. What are 403b plan document requirements re the 4 disenfranchised vendors? Section 8.01 of Rev Proc 2007-71. As to vendors 'dismissed' in 2004-08, ERs need to make a minimalist, 'reasonable, good faith effort' (whether successful or not) by exchanging contact info between the ER and vendor. That brings the vendor within the 'new, shiny plan'. Plan need not list the vendors, but may simply refer to separate listing that is updated as needed. #3: Post-2008 contract exchanges. Contract from non-approved to an approved vendor. EEs may certainly do so. Section 6.04 of Rev Proc 2007-71. #4: What is a church "convention"? Periodic meetings, such as once or twice a year, and the delayed effective date is to accommodate possible meeting schedules. #5: Consequences of failure. Treas Reg § 1.403(b)-3 Plan-wide failures; individual employee failures. INFORMATION DISSEMINATION "TOOLS" Two resources. www.irg.gov, then Retirement Plans Community, then Types of Plans, then 403b Plans. Newsletter: Employee Plans News, www.irg.gov, then Retirement Plans Community, click on newsletters and then subscribe.

Even without explicit mention in the CBA, there could be evidence, such as notes or recollections that could be memorialized by those that participated in the CBA negotiations, that dependent care benefits were discussed in good faith even though the ultimate CBA did not require the ER to provide the CBU EEs with dependent care benefits. If so, you can exclude those CBU EEs from the 55% test. If dependent care benefits were not discussed in the CBA negotiations, or the ER refused to discuss those benefits or even consider providing them when the issue was raised by the CBU representatives, then I think you have to include those CBU EEs in your 55% testing.

Mr. Kite, Do you think the rationale of Treas Reg § 1.415(f)-1(f) and (j)(ex. 6)--separate 415 limits because the employee 'maintains' the 403b plan--will continue beyond 2008 as the new 403b regs require for tax exclusion that contributions to a 403b contract be to one maintained pursuant to a 403b plan maintained by employer (Prop Treas Reg § 1.403(b)-3(b)(3))?

ER has a 'private' investment account with brokerage house where ER also has a profit sharing plan. The day before the due date for the ER's income tax return, ER gives written instruction to broker to sell $30,000 worth of the investments in the 'private' account and add them to profit sharing plan account. ER takes a $30,000 deduction for the contribution. Later, it is discovered that the brokerage house liquidated shares in the private account, raising $30,000 that automatically were money market funds under the private account. The brokerage however failed to move the $30,000 to the profit sharing plan account. This failure was not discovered until 45 days later, well after the due date for and the date that the ER's tax return was filed claiming the $30,000 deduction. Is the deduction proper? May the brokerage house now remedy the situation simply by moving the $30,000 into the plan's account?

Private Letter Ruling 200028042, April 19, 2000, issued to the State of Idaho is indeed the ruling that Larry referred to. Here are a few others since that first one that also extend a governmental 401k plan to related governmental entities: Private Letter Ruling 200125094, March 27, 2001; Private Letter Ruling 200250039, September 5, 2002; and Private Letter Ruling 200307093, November 19, 2002

The 55% test is in IRC § 129(d)(8)(A). IRC § 129(d)(9) provides that "For purposes of paragraphs (3) and (8), there shall be excluded from consideration * * * (B) employees not included in a dependent care assistance program who are included in a unit of employees covered by an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and 1 or more employees, if there is evidence that dependent care benefits were the subject of good faith bargaining between such employee representatives and such employer or employers." Therefore, CBA EEs should be excluded from consideration in the 55% test. I suspect as do you that this testing requirement is largely ignored by employers, TPAs, etc.

Bogart in Casablanca

By the way, the revival of this thread reminds me that I owe Sieve BIG TIME!!!

The deduction for the employer contribution for LLC employees to the qualified retirement plan should be taken on the LLC's Form 1065, not on the returns of the doctors' individual entities. The employer contributions to the plan for a doctor should be declared and taken as a deduction on tax return for the doctor's entity. To fund the LLC (including for the monies needed to make the retirement plan contribution for LLC staff), the individual doctors' entities could be billed for the support services provided by the LLC staff to that doctor's entity. That would generate a tax deduction for the doctor's entity, but not as an employee benefit expense for the doctor's entity. The difference probably nets out, but if the IRS examines a return of a doctor's entity, this could be a problem to get it all sorted out.

How do the doctors fund (and get a tax break) the LLC so that it can make payroll and other expenses? The funding (and tax break) for the LLC to make contributions to the plan for retirement plan purposes ought to work in the same way.

Although not directly on point, it is I think of some interest to the discussion in this thread that section 6.02(5)(b) of Rev Proc 2008-50 (current EPCRS) provides that if the total corrective distribution due a participant or beneficiary is $75 or less, the Plan Sponsor is not required to make the corrective distribution if the reasonable direct costs of processing and delivering the distribution to the participant or beneficiary would exceed the amount of the distribution.

My client had me research it exhaustively and there is no clear cut answer. It is a 'gray area' in which I analyzed the various legislative histories, IRS notices, etc. At the end of 10-page opinion letter, I concluded that there was no violation of the universal availability rule prior to 2009, i.e. that the all-or-none approach is not required to the exclusion categories from 1989-2008. The client is sending to the IRS early in the 240 day period a copy of the opinion letter and what the amount of the resulting, very circumscribed (negligible) lost opportunity contribution will be (and for which employees and how determined), so that we can gauge any contrary IRS response and perhaps yet have time during that 240 days to re-evaluate our position.

Matthew, ERISA § 402(a)(1) provides that "Every employee benefit plan shall be established and maintained pursuant to a written instrument." ERISA § 3(3) defines the term employee benefit plan as meaning "an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan." ERISA § 3(1) defines employee welfare benefit plan (and welfare plan) as meaning "any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or ... ." DoL Reg § 2510.3-1(j) exempts certain group and group-type insurance programs where the ER makes no contributions, participation is completely voluntary, the ER does not endorse the program (though the ER may allow the insurer to advertise, and collect premiums through payroll deductions paid over to the insurer), and the ER gets no kickbacks or other remuneration than perhaps reasonable compensation for the payroll deductions/remittances. An HRA is an employee welfare benefit plan. It is a "program ... established or maintained by an employer..., to the extent that [provides] for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, ... ." Because the ER makes contributions--indeed the ER is the sole source of funding of an HRA--then the DoL Reg § 2510.3-1(j) does not apply. Ergo, ERISA applies to HRAs (unless exempted as noted below) and requires that the plan be in writing. DoL Reg § 2510.3-3 exempts from ERISA plans without EEs--i.e., where the owner (and possibly spouse) of the employer are the only participants. Also, ERISA § 4(b) exempts the plans of governmental and church plans, plans maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens, and plans maintained solely for the purpose of complying with applicable workmen's compensation laws or unemployment compensation or disability insurance laws. If not for that, ERISA applies and requires an HRA document.

Is there reality to Mr and Mrs X being EEs of Corp A rather than just of Union B? Or is Corp A and its contract with Union B a mere artifice to avoid Mr and Mrs X being just EEs of Union B? If the reality is that Mr and Mrs X are just Union B employees, they cannot have a separate 401k profit sharing plan. You'd need to be comfortable that analyzing EE v Independent Contractor (per IRS and court case factors) points to Corp A/Mr and Mrs X really being an independent contract situation with Union B before you ought to try this.

Matthew, where does the DoL state that a plan document is not required if after-tax dollars are at play? and how do you get around the written plan requirements of ERISA § 402(a)(1) for any employee benefit plan subject to ERISA?

The failure is to obtain spousal consent before payouts under a plan subject to QJSA rules. The owner/EE has about $1.4m in plan (after withdrawing a couple of hundred thousand dollars without the benefit of spousal consent). Spouse is cooperative. However, under Rev Proc 2008-50, section 6.04(2)©, it is provided that if spousal consent to the prior distribution is not obtained, the plan may offer the spouse a choice between a QJSA survivor benefit computed on the benefits as though there had been no withdrawals or "a single-sum payment equal to the actuarial present value of that survivor annuity benefit (calculated using the applicable interest rate and mortality table under § 417(e)(3)). Any such single-sum payment is treated in the same manner as a distribution under § 402©(9) for purposes of rolling over the payment to an IRA or other eligible retirement plan." Given that there is only $1m of creditor protection for IRAs, this 'correction' alternative could seemingly be used to rollover some of the $1.4m at issue into an IRA for the spouse and the remainder could be rolled over into an IRA for the employee. If for whatever reason a liability cropped up, more retirement benefits of this couple would be protected using this correction alternative than the spouse giving consent to the prior distributions. (This might also make easier estate tax avoidance in planning their estates.) Agree? Disagree? See any flies in the ointment?

IRC section 402(b)