TLGeer

I have done parsonage allowance work, including legal opinions and obtaining private letter rulings. Here are some thoughts. Has the participant retired? Post-retirement parsonage has been a no rulings area for IRS for some time. In addition, there are hoops you have to jump through, in order to claim the exclusion. There is an excellent article on this at www.churchbenefitsassociation.org/AnnualMtg/Workshop07/program/06_Housing_Allowance_for_Clergy_Retirement_Plan_Issues.pdf Parsonage allowance issues can be straightforward or very difficult, depending in the circumstances. The fact that anyone administers a retirement plan with members of the clergy in it does not give them any particular expertise in the area, so your declining to make a determination should not surprise anyone. Except in a very clear case, I recommend you would take the position that somebody else has to determine the applicability of the parsonage allowance exclusion. Perhaps the employer's counsel or CPA? Or could you retain an expert at the employer's cost? Tom Geer

The basic reason an employer might want two plans, rather than one, was to avoid having to deal with the application of the 403(b) limits to amounts becoming vested. The two-plan design is therefore obsolete. Since that problem is gone, I don't see why the employer wouldn't just have ane plan, and make it the 403(b). There are, of course, transitional issues, but the employer can either freeze or terminate the qualified plan.

Wow, what a question! The lack of an ADP test, as mentioned by mjb ties in with your remark that the hospital does not want to do a safe harbor. So the 403(b) plus 457 option mjb outlines should handle your stated needs. To avoid offering the 403(b) too widely, you could look at (1) having the HCE excluded from the 401(k) plan, and (2) excluding participants in the 401(k) from the 403(b). Discrimination analysis of the 403(b) takes into account the 401(k), and the 401(k) participant exclusion is expressly allowed under the universal availability rules. I think it would be easier to do s single-participant 457 than to horse around with 403(b). A 457 not only can discriminate, it has to, so there are fewer issues. Of course, you lose the 403(b) catch-up, but you gain the 457 catch-up.

I don't quite understand this topic. Is the topic why a single SD would have multiple plans? Is it why a single SD would have multiple documents for a single plan (because that's easy, the answer being never)? Is it why vendors want to use their own documents?

I offer plan documents on a per plan basis. I view the model plan as a problem, because it simply does not take into account loads, penalties, withdrawal restrictions and the like. It's anguage could leave the employer on the hook for these in some circumstances. Also, if you are trying to avoid ERISA, there are decisions (hardships, loans, distributions generally) that can cause the plan to lose the ERISA exemption. If you would like a quick run-down, contact me off-line.

See 1.403(b)-3(b)(3)(i): "A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan..." and 1.403(b)-10(f)(1): "Except for a TEFRA church defined benefit plan as defined in paragraph (f)(2) of this section, section 403(b) does not apply to any contributions or accrual under a defined benefit plan." 457 clearly allows DB plans. 1.457-2(b)(3) states: "If the eligible plan is a defined benefit plan within the meaning of section 414(j), the annual deferral for a taxable year is the present value of the increase during the taxable year of the participant's accrued benefit that is not subject to a substantial risk of forfeiture (disregarding any such increase attributable to prior annual deferrals). For this purpose, present value must be determined using actuarial assumptions and methods that are reasonable (both individually and in the aggregate), as determined by the Commissioner." That is, the limitation applies to the increase in the vested accrued benefit, including amounts previously accrued but becoming vested. The increase in value resulting from the passage of time is not taken into account. Note that if the 457 is governmental, it must be fully funded as to vested accrued benefits, with none of the normal contribution smoothing allowances for experience losses.

This isn't something I've reviewed in nauseating detail, but I do have another alternative. The 403(b) regs use hours worked rather than hours of service, so if an ERISA plan required 1000 hours worked in the first ERISA eligibility computation period it would meet the 403(b) standard but not the ERISA one for the next year. I find the vagueness of that particular part of the regulations very unfortunate. What does "reasonably expected" mean? Does "hours worked" absolutely track the meaning in the DOL Regs? How do ERISA and universal availability interact? Also note that "hours worked" doesn't mean hours worked under the DOL regs dealing with equivalencies (2530.200b-3(d)). And, of course, at what point did the employer "reasonably expect" the actual end result of 1000 hours worked result in the first year? I try to discourage use of the exemption, particularly when it is simple enough to impose eligibility standards on the match, if there is one. I just think we need a couple of Rev Ruls to clarify the ambiguities. This is one of those areas where brains can get locked into one conceptual framework, so I'm very interested in your comments. The one thing that is absolutely clear is that your vendor is wrong that 403(b) requires participation for all years after entry. Tom Geer

Generally, the answer is that deferral limits are personal. The only way to use a 403(b) to increase deferrals is if the 403(b) would have a higher deferral limit (which some do). A 457 is purely additional, except as to catch-ups where there is some interaction between 457 and 414(v). Even then there is an additional amount for having a 457. If you want a hard answer, you need to put out a lot more data. Even then, how you do it (i.e., maximize deferrals) is a judgment call, that should not be answered in this sort of a forum. Tom Geer

In that case, I recommend (1) adopt a good plan document, (2) take action to terminate the plan, and (3) direct the payment of benefits in the form of a distribution of the funding vehicles. Basically, you do this by telling the participants, custodians and insurers that you have terminated the plan, have made in-kind distribution of the funding vehicles, and that you have no further role with respect to the funding vehicles. I would include a sentence saying that if the issuer or the participant determines that the in-kind distribution might be taxable, the distribution will not take effect until such time as the funding vehicle is modified or replaced to avoid such taxation-e.g., convert a 403(b) custodial account to an IRA custodial account.

What are the employer's future intentions? 403(b)? 401(k)? Nothing?

If the plan is governmental (in the ERISA sense) or a church plan, it can cover a broader group. The critical issue is for nongovernmental (in the 457 sense) 457(b)s and all 457(f)s to avoid ERISA funding rules. All proper 457(b)s and 457(f)s are fully ERISA exempt, and therefore have no 5500 requirement.

I would argue that the writing requirement has always been in 403(b)(5), specifically because a 403(b) has always had to meet the basic statutory requirements and 403(b) has always require aggregation of contracts. This was implicit rather than explicit and never enforced. But it has always been true that, for example, the possibility of multiple hardships or the lack of any enforcer of annual limitations could be used to blow up a 403(b). Which I guess is neither here nor there, given the non-enforcement. As to finding a 403(b) document suited for a church plan, good luck. Church plans have their own rules, with two basic differences in the common remitter environment, the fact that by using a retirement income account the plan can avoid offering only mutual funds and annuities and, oh, the fact that the pesky universal availability rule doesn't apply. Document providers are not drafting to that niche, so the ordinary documents provided by the usual providers may not fit very well. I have a form of common remitter document that does work, but I'm hardly a usual provider.

However, the "reasonable agreement protecting the institution or district from any liability attendant to procuring the annuity" language could be read to encompass a 403(b) information sharing agreement. It's intended to allow hold harmless agreements, but it doesn't limit itself to hold harmless agreements and including an ISA withion its terms would be consistent with the obvious statutory intent.

Where is the exemption you mentioned?

Try Carol Calhoun's web site; she definitely knows what she's doing. I think you can link to it from BenefitsLink. Tom Geer

I agree on the merger issue. You will also lose the ability use both the 401(k)/402(g) annual amount and the 457 annual amount and catch-ups. Have you explored joint administration as a way of bringing down costs? Essentially, the two plans form a master trust-type vehicle, and share an internet site (showing, e.g., 457 Plan Account, 403(b) Salary Reduction Account and 403(b) Matching Account). It's not as cheap as one plan, but it's cheaper than two. Tom Geer

Ahh, there's the fun issue. Yes, ignoring 401(a)(17) is a nondiscrimination violation. Under the second and third sentences of Regs. 1.403(b)-3(d)(1)(ii), the effects are not limited to the individual employee. Everyone is at risk. When considering corrections, the first questions is what would the correction be for the same violation in a 401(k) plan. The possibility of re-administration (forfeiture and reallocation, a la ERISAatty) also has to be considered. I do not consider reclassifying as after-tax and leaving in the plan as a correction at all; if you disagree and try this route, note that the match is already subject to ACP, so making it after-tax would not change the ACP test numbers at all. No, 4973 does not apply. With respect to 403(b), it only applies if the amount exceeds the annual maximum. Corrections issues, and who gets the privilege of paying for them, are by no means clear in the current state of flux/transition. This makes for very complicated decision making that simply is not suitable for a forum that never gets all the facts. The IRS has not, and probably cannot, say that prior year violations will be ignored, but may cut some slack based on the ordinary state of people's knowledge. Also, absent the regulations (i.e., prior years) the meaning of "contract" is hardly crystal clear. Factoring in the fascinating questions about who gets to pay for the correction, it is simply too complex, and too individually variable, a set of issues for an abstract forum. No one in their right minds will provide definitive answers, and I am feeling unusually sane (other than the obvious fit of insomnia) today. Tom Geer

It's hard to tell from your summary what exactly is going on. I have a couple of preliminary thoughts, but then some questions. 1-It has always been true that 403(b) required a written document, but the market has been so fragmented that no one would take responsibility for the task. All the new regs did was emphasize the point and make it clear that where multiple contracts existed, things like annual limitations had to be coordinated somehow, and that the coordination rules had to be in writing. 2-403(b), properly understood, and since EGTRRA, has been essentially a more generous, and slightly screwy, 401(k). Before EGTRRA, the nature of the annual exclusion calculations was so complex, even without elections, that it was an employee-by-employee, year-by-year calculation. And not for the faint of heart. 3-If the 403(b) document is going to take into account that there must be a single overarching document, and the plan is not somehow exempt from ERISA, you have to have the ERISA rules. A good 401(k) plan is probably the place to start, rather than an MPPP document, because it will contain appropriate language for salary reduction contributions and you can simply pull the ADP test language out. However, it takes time and multiple drafts and reviews to get the language properly converted over. I am in the middle of marking up my old ERISA, non-ERISA and "open market" 403(b) documents, and it's not easy. Two and a half months, and I'm still not happy. 4-The fact that the plan references money purchase does not make it a 401(a), or for that matter a 403(b). You have to look at the language in detail to determine whether it is a good version of either one. The point, though, is that it is the substantive terms that determine "good" or "bad" status, not stray language about money purchase plans. 5-If the drafter didn't know about the existence of different exclusions from universal availability, you have a problem. However, there may be some language limiting to 21/1 restriction to employer contributions, and the plan certainly can do that. Now the questions: a-A match on a 0% contribution is not a match. It is an employer contribution, subject to testing as such, not to the ADP test (if it applies at all). Is that what the plan actually says? b-I don't understand the "second" match tier either. Could you provide the actual plan language? For both? c-Could the plan be church or governmental? Let's start with the question whether the employer is church-related or governmental or quasi-governmental. the regular controlled group rules dn't apply in making this determination, so think aggressively. There's a long way to go before going into a corrections program, if that is even appropriate. That is going to include asking the drafter of the plan what happened, which may very quickly turn adversarial. At the very least, when you advise the client you have to (1) give the drafter a chance to show you what you may have missed in the document (I always worry about looking silly when I review somebody else's documents), and (2) figure out whether the drafter, the drafter's malpractice insurer or the client is going to pay the freight. This would be a good time to find a "hold harmless" commitment from somebody. The fact pattern is, frankly, too complex for a forum of this sort, and at the very least somebody who does mostly or entirely 403(b) is going to have to read the whole thing. However, if you answer the above questions, I can give you the outlines of the issues. In the alternative, you can contact me off-line for a private assessment of the scope and nastiness of the problems. I suggest this because the information may be enough to let someone ferret out your client's identity. Tom Geer

No. In fact, persons covered under the 401(k) can be excluded in testing coverage under the 403(b), and vice versa. That means you have no ADP or ACP test under either plan. You don't have to formally exclude the HCE group from the 401(k) to get the same effective benefit. Essentially, the HCEs put what they can into the 401(k), then run a mid-year ADP test and redirect some or all of their money to the 403(b) over the second half of the year. You can also, of course, tie in a 457 to increase the limitations and/or avoid testing, and not be limited to mutual funds as investments.

J4FKBC's got it right. Termination-reestablishment rules for the 403(b) allow the 403(b) to permit distributions on termination. No plan mergers between 403(b) and qualified plan, but you can merge 403(b) plans. May I ask why they're doing this? It's generally not a very good idea, unless you like the ADP test or are cpncerned about hardship availability on employer money. And once you do it, it's very hard to shake the 401(k), because termination-reestablishment rules for the 401(k) don't allow termination/rollover from he 401(k). Part of what I end up doing here is dealing with this kind of decision and its adverse consequences. Having both ain't a bad thing, on the right facts, but if you have to have just one the general rule is go for 403(b). Tom Geer

Why would they prefer a 401(k) to a 403(b)? Absent a desire to avoid mutual funds or concern about availablity of hardship distributions, the 403(b) format is always preferable. The 403(b) can act as a 401(k)+, with no ADP testing and additional contribution limits. I spend a significant amount of my practice getting people out of the ADP test who didn't know they were getting into it, and you usually end up with two plans in a single master trust, because the termination-reestablishment rules for 403(b) and 401(k) are asymmetrical (i.e., you can terminate and roll over the 403(b), but not the 401(k)). The employer ought to stop and fully understand the consequences of the decision. There is also a distinct possibility of losing the 457 if the 403(b) is properly planned out, in a manner parallel to the 3% safe harbor cross-tested 401(k), with potentially higher limitations to work within. The broker is working with what he knows, and it looks like the answer he's coming up with may be wrong. Somebody should go back to square one with the employer. Tom Geer

Disclose, and then offset against your fees. Tom Geer

No Tom Geer

I had a similar situation earlier this year. The client had been moved from 403(b) to 401(k), and only then found out that the 403(b) money could not be merged into the 401(k). When the dust cleared, we recommended they have both. They wanted the capacity to use the special 403(b) catch-up rules and the flexibility to max out contributions for some employees who were approaching retirement with next to nothing, and we pointed out that the 415 limitation can be doubled with both plan types. Both plans have a "standby" employer contribution provision and "new comparability" or rate group allocation provisions, and the intention is to use the 401(k) for some employer contribution, then cross-test for the benefit of the older group without having the 415 limits constraining the plan. On the facts, this was preferable to a 457 because we could offer identical funds availability. A 403(b) plan is, more or less, a 401(k) plan with looser regulation, as J4FKBC's response indicates. The only material disadvantage is the inability to make hardship distributions from non-salary reduction contributions held in a custodial account under a 403(b), which is not relevant on your facts. Of course, a 401(k) can make non-mutual fund investments, where a 403(b) is limited to annuities or mutual funds, but in the current state of plan design consensus this rarely matters. Why did you say the new plan would not be a successor? It's pretty clear that the creation of the 403(b) would cause any termination of the 401(k) to be a termination-reestablishment and you can't directly transfer the assets, so the 401(k) is going to continue to exist. That means you have to have some positive reason to do this, because you're ging to end up paying for two plans. Also, the Nationwide contract may allow them to boot out the 401(k) and take all the back-end fees and discounts they have available because of a cesstion of future contributions. You are going to need somebody other than your salesperson to help you make this decision, if you want to be sure your decision is right. As to ERISA vs. non-ERISA, the entire marketplace was tossed up in the air with the issuance of the final regulations and FAB 2007-2. I don't expect it to land in any intelligible pattern for some months. Tom Geer

The plan document doesn't have default beneficiaries?