TLGeer

The existence or nonexistence of liability is a state law matter, with a lot of different possible answers. However, here are at least some comments. The participant will have a tax bill, and have it earlier than when distribution would otherwise be made. So, for time periods before the claim is asserted, there is probably a time value of money loss. How that would be measured for time after the claim is asserted is problematic, since employment termination is a distribution trigger event and is inherently uncertain and within the participant's control. Beyond that, it's all going to be state law. If the sponsor of the 457 is governmental for purposes of 457 and has a trust, trust law may create liability. I don't see much potential under insurance laws if there is an annuity or custodial account under a 457-governmental plan. Otherwise, it would likely be a function of state contract and labor laws and of any specific statutes dealing with 457 plans. There probably are specific statutory provisions. This is a result of ERISA exemption. ERISA makes plan fiduciaries fiduciaries, but where ERISA does not apply, there has to be something else that creates fiduciary status. Otherwise, no fiduciary equals no fiduciary duties. Thus, there is no way of answering your question meaningfully without knowing more facts and spending more time. This is particularly the case if you are looking for advocacy or negotiating positions rather than this sort of detached analysis. If you would like to review your situation in a way that allows disclosure of details, let me know. Tom Geer

May I ask a preliminary question? Who is "we"?

This is a narrow response. The loans are combined in applying the limitations, and no exemption exists. More broadly, this does not necessarily "disqualify" the plan, but simply makes the excess loan amounts taxable. The regs. under both 457 and 403(b) provide that as long as a loan is truly a loan based on the facts and circumstances in the regs., an excess amount will not be a banned distribution, just a tax event. This is true no matter how many plans (1, 2, 3 or more) are making loans.

First, I need to apologize. I reacted and responded as of this were a more common situation presenting this issue. Given the existence of employer contributions, they need a 403(b) document, to wrap around the funding vehicles and to define the employer contribution rules and limit their amounts within 403(b). This is not a matter of options, it's required.

It's highly unlikely that vendor documents will comply. Two examples. First, the custodial accounts will limit contributions to each account, but probably will not take into account contributions to other permitted investments. Second example, they almost certainly will not coordinate as to loan limitations or on hardship amounts. I prefer to think of the 403(b) document as a wraparound plan document. This structure addresses plan-level issues in the plan document and then simultaneously incorporates and subordinates the vendor contracts. You should seriously consider a retirement income account. The underlying assets are still held in custody somewhere, but in an ordinary brokerage account. The investments are not limited to annuities and mutual funds. Last, the additional custodial account limitations on distributions do not apply. Tom Geer

I fail to see the problem, and in two senses. First, whether or not the plan has an administrative committee has nothing to do with whether or not it is a church plan. In fact, church plan status means the plan does not have to have an administrator, in the formal sense, at all, since the plan administrator concept is an ERISA concept. So, absent additional facts, it is tough to see how adding one has much to do with church plan status. Second, under the church plan definitions in both ERISA and the Code, as long as a plan is maintained by a church or convention or association of churches that is tax-exempt, the plan can be fixed within the statutory correction period without ever being classified as a non-church plan. And the 270-day correction period doesn't even start until the IRS sends a default notice. As a result, I am hesitant to give an answer because I don't fully understand the situation. Tom Geer

Nothing in 457 would prohibit this. Tom Geer

Has the plan administrator made a formal election under 410(d)? Probably not. If not, the presence of inappropriate ERISA language in the plan document is irrelevant, and no 5500s at all need be filed. An otherwise church plan that has made an election cannot be converted to church plan status, as the election is permanent. The law firm's advice here appears to be inadequate, at best. Please update this thread for the law firm response. Thomas L. Geer, J.D., LL.M.

First, thanks to lippy for finding the reference. For the life of me, I couldn't find it. I kept looking at 403(b) and 401(a)(4), because I forgot how badly designed the 401(a)(4)/410(b) regulations are. I feel the need to make a clarification. I doubt it matters here, but there is a potential issue that depends on what type of 403(b) is involved. 1.410(b)-7(f) says: "(f) Section 403(b) plans. In determining whether a plan satisfies section 410(b), a plan subject to section 403(b)(12)(A)(i) is disregarded. However, in determining whether a plan subject to section 403(b)(12)(A)(i) satisfied section 410(b), plans that are not subject to section 403(b)(12)(A)(i) may be taken into account." By its terms, this (1) excludes most 403(b) plans from the qualified plan testing, but (2) takes the 403(b) into account if the sponsor is a 403(b)(12)(B) church. If the plan is a "governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof)" under 403(b)(12)©, it is only partially subject to 403(b)(12)A)(i), so the application of 1.410(b)-7(f) is a little unclear. However, the precise wording of 403(b)(12)© does not make 403(b)(12)(A)(i) inapplicable, so governmental plans should be taken into account. The result is certainly bizarre, but bizarre is not surprising when the seams between 401(a) and 403(b) (and/or 457(b)) are at issue. Given that, there is no reason in the regs. to distinguish salary reduction contributions under a church's plan or governmental plan from employer contributions when applying the general nondiscrimination test. If the plan is taken into account, they should be treated the same as salary reduction contributions under 401(k). Note that 403(b)(1)(D) does not require that the plan be a church plan under the general tax or ERISA rules, while the governmental plan rule at 403(b)(1)© requires governmental plan status under 414. However, if my inference that the non-profit here is not a church or a State or local government or political subdivision thereof (or agency or instrumentality thereof) is right, none of this gobbledygook matters to you. One last comment. Yes, if you are testing the 403(b), taking the 401(a) into account is elective. If a one-plan test doesn't work, do a two-plan test.

Good question. The regs. are poorly written on this very point. The probable reading is that they do not have to be unforeseeable in fact. Don't forget the financial hardship requirement (i.e., suspend contributions, liquidate other assets). Does the plan document permit loans? These are not subject to the same uncertainties, so a denial of a hardship distribution would still leave a loan available. And a loan does not require actual financial hardship or suspension of contributions. Tom Geer

And the time restriction for making the match under ACP testing is 12 months. Regs. 1.401(m)-2(a)(4)(iii). The terms "suspend" is unclear. Was the plan document amended? If so, what did it say before and what does it say now? Discretionary? Tiered? Cap on compensation to be matched? Did they just stop making matching contributions? If matching contributions were discretionary and they just stopped, what s the plan document's language as to the calculation period for a match? In particular, if there were matching contributions for part of the year, did the document require a true-up at year-end? Based on the answers to these sorts of questions, additional issues may or may not exist.

There are three kinds of restrictions involved here, and two levels of analysis. First are restrictions required under 1.403(b)-6. These cannot be eliminated in any way and follow the money around the plan. So a transfer from a custodial account to an annuity does not permit the additional restrictions place on custodial accounts, regardless of how the transfer is implemented. Second are additional restrictions contained solely in the plan document. These can be eliminated by amendments to the plan document. The regulations have no limitation on amendments, either general or specific to restrictions on distribution. Third, and more difficult to deal with, are additional (i.e., not required by 1.403(b)-6) restrictions contained in the terms of the investment vehicle. The issuer can eliminate these to the same extent the employer can eliminate additional restrictions in the plan document, but that is unlikely. The employer, in connection with a plan merger, can allow contract exchanges to an alternate investment vehicle with fewer restrictions, but contract exchanges in the ordinary course of operations must carry these restriction forward. (contrast "distribution restrictions with respect to the participant that are not less stringent than those imposed on the contract being exchanged" in 1.403(b)-10(b)(2)© with "any distribution restrictions under §1.403(b)-6" in 1.403(b)-10(b)(3)(F).) This last is a slightly aggressive reading. The drafters appear to have been thinking only of plan level-only issues in (3)(F) and only of investment vehicle-only levels in (2)© and appear not to have noticed the interstitial situation where investment vehicle-level restrictions are modified in connection with a merger. However, the language seems pretty clear. Note that I view the additional regulation of restrictions not required under 1.403(b)-6 as gratuitous. An implication of the different treatment of contract exchanges within a single plan and those in connection with a merger is that it matters which plan, in form, survives. If all investment vehicle dogs with non-required restrictions are in Plan A, then make it merge into Plan B. Otherwise, assess, balance and apply judgment. Tom Geer

Yes, I agree the rules should be in the plan document. You would still be in a posture where people could be improperly excluded under the minimum standards, so you would still need a fallback rule. Given the need for a fallback rule based on actual HOS or an equivalency, explain to IRS that the general rule meets minimum standards and that the 3X rule is nondiscriminatory. Individual employees could, of course, show higher HOS than the 3X norm with appropriate proof and become eligible. Tom Geer

You are correct as to hardship distributions. Loan provisions are generally not subject to this rule. The plan-to-plan transfer rule as to distribution restrictions only appleas to restrictions under Regs. 1.403(b)-6. Regs. 1.403(b)-6(f) says: "(f) Loans. The determination of whether the availability of a loan, the making of a loan, or a failure to repay a loan made from an issuer of a section 403(b) contract to a participant or beneficiary is treated as a distribution (directly or indirectly) for purposes of this section, and the determination of whether the availability of the loan, the making of the loan, or a failure to repay the loan is in any other respect a violation of the requirements of section 403(b) and §§1.403(b)-1 through 1.403(b)-5, this section and §§1.403(b)-7 through 1.403(b)-11 depends on the facts and circumstances. Among the facts and circumstances are whether the loan has a fixed repayment schedule and bears a reasonable rate of interest, and whether there are repayment safeguards to which a prudent lender would adhere. Thus, for example, a loan must bear a reasonable rate of interest in order to be treated as not being a distribution. However, a plan loan offset is a distribution for purposes of this section. See §1.72(p)-1, Q&A-13. See also §1.403(b)-7(d) relating to the application of section 72(p) with respect to the taxation of a loan made under a section 403(b) contract." Regs. 1.403(b)-7(d) includes the following sentence: "A deemed distribution is not an actual distribution for purposes of §1.403(b)-6, as provided at §1.72(p)-1, Q&A-12 and Q&A- 13." Tom Geer

So, no discrimination issues.

I agree as to fiduciary duties. However, I see no basis for assessing participants. Also, you have issues as to whether the plan is going to have unrelated debt-financed income on sale and it is possible that the trust instrument prohibits plan borrowing. If the mortgage allows recourse against the plan, as an accounting matter you would subtract the underwater amount from the other plan assets. If the liability is nonrecourse, the land, net of the mortgage would be a zero. The fact that there are fiduciary duty issues may be a good thing, depending on the employer's general attitude to the plan. Payments to a plan resulting from breaches of fiduciary duty are not considered to be contributions subject to testing or annual additions subject to limitations. This allows a de facto contribution that is "allocated" based on account balances. Last, you should evaluate whether a transfer of the property is viable, to reduce the risk of future fluctuations and eliminate the risk of debt-financed income. Is a distribution of the property viable? Is a transfer subject the the mortgage (with a release of the plan) a "cure" and a net payment that is not tested or limited? These issues are too complex to deal with here. Tom Geer

The hours of service regulations are, strictly speaking, part of the ERISA/Code minimum standards for service requirements on eligibility. This means that any method for determining service eligibility that captures all who have met the minimum standards meets the minimum standards. (E.g., requiring only 500 HOS for a YOS.) A prophylactic clause based on a permitted equivalency (e.g., elapsed time) solves this problem. The real problems arise later in the analysis. The fundamental issue is discrimination. If the instructor group consists disproportionately of HCEs, this could raise discrimination issues. Potential risks include basic coverage discrimination and benefits, rights and features discrimination. Since these issues are more complex, could you provide detail on HCE status? Otherwise, the issues have to be discussed twice, once for high HCE rates and once for high NHCE rates. Tom Geer

Controlled group status has nothing to do with the number of plan documents. If a single entity can have multiple plans, as it can, then so can members of a single controlled group. Just as an aside, the facts make me wonder whether there could be a QSLOB here. Not immediately important, but might be relevant if there are dscrimination issues down the road. Tom Geer

I've done this, and survived audit.

No. The 457 catchup is the lesser of the general limitation or the unused prior year limitations. Where there were no prior year limitations under the plan, because there was no plan, there is no unused limitation. Regs. 1.457-4©(3)(iii) covers this as follows: (iii) Determining underutilized limitation under paragraph ©(3)(ii)(B) of this section. A prior taxable year is taken into account under paragraph ©(3)(ii)(B) of this section only if it is a year beginning after December 31, 1978, in which the participant was eligible to participate in the plan, and in which compensation deferred (if any) under the plan during the year was subject to a plan ceiling established under paragraph ©(1) of this section.

Regs. 1.401(m)-1(a)(2) defines matching contributions as: (2) Matching contributions—(i) In general. For purposes of section 401(m), this section and §§1.401(m)–2 through 1.401(m)–5, matching contributions are—(A) Any employer contribution (including a contribution made at the employer's discretion) to a defined contribution plan on account of an employee contribution to a plan maintained by the employer; (B) Any employer contribution (including a contribution made at the employer's discretion) to a defined contribution plan on account of an elective deferral; and © Any forfeiture allocated on the basis of employee contributions, matching contributions, or elective deferrals. (ii) Employer contributions made on account of an employee contribution or elective deferral. Whether an employer contribution is made on account of an employee contribution or an elective deferral is determined on the basis of all the relevant facts and circumstances, including the relationship between the employer contribution and employee actions outside the plan. 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 fact that there are no HCEs in the plan means that discrimination is not an issue. So the question you ar raising is whether this is a matching contribution at all. Given the facts, I don't think that issue is relevant. As long as the plan satisfies the requirement for a definite formula for allocation of contributions, the plan should be OK. The rules related to matching contributions are all related to nondiscrimination. Since there are no HCEs, who cares? Even if the status as a marching contribution were relevant, your plan should still be OK. The contribution would still be "made on account of" the deferrals. The fact that the contribution is made on account of the first dollar of deferrals rather than on account of each dollar of deferrals does not matter. Not to say the IRS won't be troubled by this. My experience is that when there is a highly unusual plan provision, the IRS wants to know the underlying business reason. Even where that reason is not relevant, it goes to showing a non-abusive purpose and helps them feel more comfortable with the unusual provision. I would document the business reasons thoroughly.

You don't have to. As long as the nonprofit meets universal availability, you're fine.

Agreed. The employee is treated as the employer under the 403(b). Unless the employer is 50% controlled by the employee, the limits are additive. The employee can get a full 415 limit under each. Note also that the 457 limitations are additive. The various catch-ups are better coordinated.

As to existing amounts, Regs. 1.403(b)-10(b)(2)(i)© lists as a requirement for a contract exchange within a plan that "The other contract is subject to distribution restrictions with respect to the participant that are not less stringent than those imposed on the contract being exchanged, and the employer enters into an agreement with the issuer of the other contract under which the employer and the issuer will from time to time in the future provide each other with the following information: (1) Information necessary for the resulting contract, or any other contract to which contributions have been made by the employer, to satisfy section 403(b), including information concerning the participant’s employment and information that takes into account other section 403(b) contracts or qualified employer plans (such as whether a severance from employment has occurred for purposes of the distribution restrictions in §1.403(b)-6 and whether the hardship withdrawal rules of §1.403(b)- 6(d)(2) are satisfied)." (The last part is the dreaded and loathed ISA.) There is no support for segregating amounts transferred (earnings-adjusted) from subsequent contributions (earnings-adjusted) and allowing expanded distribution rights as to the latter. In fact the language quoted above is phrased in terms of the contract, not the account or sub-account. Further, Regs. 1.403(b)-10(b)(2)(iii) explicitly provides that compliance with © cited above is subject to subsequent guidance by the IRS, but none has been issued. The result is nonsensical, given that tracking pre- and post-transfer amounts is pretty easy, so I looked at the definitions and effects provisions under 403(b) to try to finagle a way out by finding a narrower use of the term contract. No help there, since the general use of the term includes all of a participant's rights under the plan, a broader definition. I'd really like to be wrong on this, so any disagreements from others are more than welcome. Tom Geer

The Regs. don't use the term spinoff. This term is a slang term, developed initially under Code 355, for the distribution of a subsidiary's stock to current shareholders. What you want to do would be, more slang-properly, s splitoff. The relevant provisions of the regs. are as follows: (3) Requirements for plan-to-plan transfers of all plan assets of eligible governmental plan. A transfer under paragraph (b)(1) of this section from an eligible governmental plan to another eligible governmental plan is permitted if the following conditions are met— (i) The transfer is from an eligible governmental plan to another eligible governmental plan within the same State; (ii) All of the assets held by the transferor plan are transferred; (iii) The transferor plan provides for transfers; (iv) The receiving plan provides for the receipt of transfers; (v) The participant or beneficiary whose amounts deferred are being transferred will have an amount deferred immediately after the transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer; and (vi) The participants or beneficiaries whose deferred amounts are being transferred are not eligible for additional annual deferrals in the receiving plan unless they are performing services for the entity maintaining the receiving plan. (4) Requirements for plan-to-plan transfers among eligible governmental plans of the same employer. A transfer under paragraph (b)(1) of this section from an eligible governmental plan to another eligible governmental plan is permitted if the following conditions are met— (i) The transfer is from an eligible governmental plan to another eligible governmental plan of the same employer (and, for this purpose, the employer is not treated as the same employer if the participant's compensation is paid by a different entity); (ii) The transferor plan provides for transfers; (iii) The receiving plan provides for the receipt of transfers; (iv) The participant or beneficiary whose amounts deferred are being transferred will have an amount deferred immediately after the transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer; and (v) The participant or beneficiary whose deferred amounts are being transferred is not eligible for additional annual deferrals in the receiving plan unless the participant or beneficiary is performing services for the entity maintaining the receiving plan. Your splitoff is not eligible under (3) because not all assets would be transferred. As to (4), we would need to know who pays the participants before the transfer and after. If it has been, and continues to be, the city, you should be OK. If the court has paid them or will pay them, the issues are more complex and you should get some individualized professional advice. Can you do a (4) then a (3)? What issues arise if the plan has multiple employers? Is it a single plan or (at least) two (depends on facts)? Does the plan have employer contributions with vesting? If so, what happens to nonvested amounts? As to prior history, what specifically are your concerns?