Carol V. Calhoun

I try to avoid advertising on this board, but since you asked, our firm (Venable LLP) has a lot of experience in that area. A public message board is probably not the best place to communicate, though. If you'd like to discuss, you can send me a message via my contact form.

Is anyone else finding the guidance a bit odd? In the world of qualified plans, we've normally had a deadline by which a pre-approved plan sponsor must amend its plan and apply for a determination letter, and then a later deadline by which an employer must adopt the plan as approved by the IRS. However, in the case of 403(b) plans, the IRS has announced the date by which employers must adopt a pre-approved plan, but not the date by which plan sponsors must update their plans. Could a sponsor wait until March 31, 2020 to submit the plan, have employers adopt it before it was submitted, and have the employers protected? But if so, what protection would the employer have in case the sponsor decided to give up on the application before it was approved?

If they plan covers solely employees of one or more international organizations, it's a governmental plan. If it is a multiemployer plan that covers mostly collectively bargained employees of private employers, but also covers collectively bargained employees of an international organization, it is not a governmental plan.

No, there are no special rules where the excess annual addition consists of pick-up contributions. They are basically just treated as employer contributions. However, as a practical matter, I would reduce discretionary employer contributions before picked-up contributions. To the extent that you have reduced employees' paychecks in order to make the picked up contributions, you're likely to have a lot of issues if you then use the money for other employees, or to reduce employer contributions in a later year.

Yes, there may be. In the case of an individual employed in the US, Form W-2 compensation is a safe harbor for 415 purposes. However, as indicated above, the regulations specifically say that the 415 safe harbor does not apply for 403(b) purposes. Moreover, even if the 415 safe harbor applied, the actual safe harbor is not Form W-2 compensation, but 26 CFR § 1.415(c)-2(b)(1). In the case of an individual employed in the US, Form W-2 compensation is a safe harbor. However, in the case of an individual employed abroad, it is not. 26 CFR § 1.415(c)-2(d)(3) provides that: 26 CFR § 1.415(c)-2(g)(5) discusses the meaning of that "location of employment" rule as follows: So even if Form W-2 withholding does not apply, or if the Code section 911 exclusion causes the income not to be taxable at all, it would still be compensation for section 415 purposes. So basically you've got two issues in applying the section 415 safe harbor for W-2 wages in this case: The 415 safe harbor doesn't apply for purposes of section 403(b). Even if the 415 safe harbor did apply, it does not actually permit you to exclude wages paid to US citizens employed abroad.

The 415 safe harbor does not apply for purposes of determining compensation for 403(b) purposes. As mentioned above, section 403(b) has its own definition of includible compensation. 26 CFR 1.415(c)-2(g)(1) provides that the 415 safe harbor does not apply for purposes of a 403(b) contract, and that instead we need to look to the definition of includible compensation.

She does not need to be made eligible for the employer contribution, so long as her exclusion does not cause the plan to fail 410(b) or 401(a)(4) testing. However, I would strongly recommend amending the plan to specify the definition of compensation separately for deferrals and employer contributions. If you have only one definition, and have to interpret that broadly in order to meet the universal availability test, she could argue that it should be interpreted equally broadly for purposes of employer contributions.

This is not a plan language issue. The problem is the universal availability rule of 403(b)(12) for elective contributions. Nonresident aliens can be excluded, but this person is not an alien. I'd have real concerns if the plan definition of compensation excluded someone who had compensation that would be counted under 403(b)(3).

It shouldn't. The issue is whether the US can tax it. How it is reported to the Canadian authorities is irrelevant.

It depends on the terms of the DB plan. A DB plan is permitted, but not required, to accept rollovers. And if it accepts them, it can provide for whether they simply go into an account for the participant, or may be used to purchase an annuity.

Includible compensation is not defined as W-2 compensation. It is "the amount of compensation which is received from the employer described in paragraph (1)(A), and which is includible in gross income (computed without regard to section 911) for the most recent period (ending not later than the close of the taxable year) which under paragraph (4) may be counted as one year of service, and which precedes the taxable year by no more than five years." Code section 403(b)(3). A US citizen is typically subject to tax on worldwide income, subject to the section 911 exclusion. So unless there is something screwy in the US/Canada income tax treaty, I suspect that she is subject to tax on her income, and thus that the income can be the basis for a 403(b) contribution. Of course, whether she would want to make a 403(b) contribution might depend on Canadian law. (If they would tax her income without any exclusion for the 403(b) contribution, she might decide that the tax benefits of a contribution would not be worth it.) But I suspect that she should at least be offered the opportunity to participate in the 403(b), unless her compensation is for some reason entirely excluded from income for US tax purposes.

A few thoughts: As others have discussed, some 457(f) plans pay out later than they vest, for non-tax-related reasons. Although deferrals are taxed when they become vested, income accrued thereafter is not subject to immediate taxation. Thus, the payment of that income may be subject to 409A. A substantial risk of forfeiture can exist for purposes of 457(f) based on a noncompete agreement under certain circumstances. Such an agreement can never postpone the SRF for 409A purposes. So it is possible to have an agreement under which the amount is paid out when the SRF lapses for 457(f) purposes, and still have the agreement considered deferred compensation for 409A purposes.

Thank you, Mike, that was exactly what I was looking for!

§ 1.401-1(b)(ii) permits a profit-sharing plan to have discretionary contributions, but requires that it have a "definite predetermined formula for allocating the contributions made to the plan among the participants." My question is whether a profit-sharing/401(k) plan can provide for board discretion to determine after the close of the plan year, but before a contribution is made, to which groups of participants the contribution will be allocated. Specifically, what we want to do is to specify in the plan that the board can decide to make discretionary contributions as follows: No contribution at all. Contribution to be allocated solely to the accounts of collectively bargained employees. Contribution to be allocated to the accounts of all employees (including collectively bargained). In any given year, the employer could elect to make contributions under 2 and 3. However, the employer would not be permitted to elect to make a contribution solely to the accounts of employees who are not collectively bargained. On the one hand, it could be argued that the formula is not predetermined, because the board's characterization of the contribution could result in its all being allocated to collectively bargained employees, or allocated to all employees. On the other hand, this seems no more objectionable than having two plans (one for collectively bargained, one for everyone else), and having discretionary contributions to each. For various reasons, we don't want to split the plan. Does anyone have any thoughts about whether this is a problem within a single plan?

Of course she can charge him for paying by check, in the sense she can offer him a smaller amount by check outside of the 403(b) in exchange for him agreeing to have the court void the QDRO. This may be the best alternative for both parties. The check she writes him would be considered part of the property settlement (and thus not taxable to him), so he could end up with as much money after taxes even if the check is less. Meanwhile, by writing a check, she increases the amount she will ultimately get from the 403(b) by more than the amount of the check (because he will no longer get anything from the 403(b)), without it being treated as a contribution to the 403(b) subject to the usual maximum limits. Yes, they should have thought of all this before entering into the QDRO. But if both parties are willing to amend the QDRO, better late than never (unless the costs associated with amending the QDRO are so high as to make the whole thing uneconomic).

To the extent that the 403(b) is covered by ERISA (not all of them are), it would need to comply with the requirements of ERISA § 205, 29 USC § 1055. One of that section's requirements for avoiding QJSA/QPSA requirements is:

Yep, a 403(b) and 401(a) of a particular employer are aggregated for purposes of the 402(g) limit, but not for purposes of the 415© limit. However, if the employee has a business that the employee controls (e.g., a professor in a med school who also has an independent practice as a physician), the 403(b) is combined with any 401(a) of the business controlled by the employee for 415© purposes.

I've heard informally that IRS has not retreated from that position, but I haven't seen anything formal.

They are annual. But my question related to what happens if one is terminated, or if the employer ceases to exist, mid-year. And the old thread seems to be dealing with health FSAs, which have a bunch of special rules (uniform coverage, COBRA, etc.). Dependent care is not covered by those rules, so the law on them seems rather murkier.

Yeah, my concern is that even if it's returned to participants on a "reasonable and uniform basis," the guy who put in the $2,400 loses at least most of it (since it would be divided among all the employees, not just the specific one who made the contribution). Since all of the money was employee money, it doesn't seem right that an employee could lose it due to the employer's decision to terminate. But I'm not seeing a lot of other options.

This one seems like there should be a simple answer, but I'm not finding it. What happens if an employer terminates a dependent care FSA in mid-year? For example, suppose the employee is putting aside $400 a month. The employer terminates the plan June 30, so the employee has put away $2,400. However, the employee has received no reimbursements yet, having expected to use the whole amount only in the last six months of the year. (For example, the employee's wife is home and taking care of the baby for the first six months of the year, but the money was put aside to cover child care for the last six months.) Can the employer simply cut the program off, with the employee losing the $2,400? May the employer stop future contributions, but still pay out the $2,400 already contributed? Or must the employer continue the plan until the end of the year, so that the employee can contribute the full $4,800? And what if the employer ceases to exist? In that case, options 2 and 3 are out of the question. Does the employee just lose the money?

This one seems like there should be a simple answer, but I'm not finding it. What happens if an employer terminates a dependent care FSA in mid-year? For example, suppose the employee is putting aside $400 a month. The employer terminates the plan June 30, so the employee has put away $2,400. However, the employee has received no reimbursements yet, having expected to use the whole amount only in the last six months of the year. (For example, the employee's wife is home and taking care of the baby for the first six months of the year, but the money was put aside to cover child care for the last six months.) Can the employer simply cut the program off, with the employee losing the $2,400? May the employer stop future contributions, but still pay out the $2,400 already contributed? Or must the employer continue the plan until the end of the year, so that the employee can contribute the full $4,800? And what if the employer ceases to exist? In that case, options 2 and 3 are out of the question. Does the employee just lose the money?

In the case of a governmental plan, it would be based on the plan document, except to the extent that applicable state law would require crediting of interest. Of course, since the idea behind DROP is to encourage people to stay beyond when they could otherwise receive retirement benefits, not crediting interest could undercut that goal.

John Feldt is right, except to the extent that the amounts in the 457(b) plan consist of rollovers from another type of plan or IRA.

As Belgarath says, an employee cannot terminate a plan; only the employer can. And in the absence of a plan termination, you cannot receive a distribution earlier than the earliest of: the calendar year in which you turn 70-1/2; when you have a severance from employment; when you have an unforeseeable emergency. Code section 457(d)(1)(A). There is a limited exception to this for governmental plans which allows for a distribution if your total account balance (not including rollovers) is less than $5,000, you haven't made contributions for 2 years, and you haven't received a prior distribution. See Code section 457(e)(9)(A) for details.