Carol V. Calhoun

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.

As Fiduciary Guidance Counsel says, in establishing any plan on behalf of a local government entity, you always have to check state law to make sure that the entity has the authority to establish a plan. However, if it does, there is no objection to using a 401(a) plan to match contributions to a 457(b) plan. In fact, it makes a lot of sense in the context of a governmental plan to make 457(b) matching contributions to a 401(a) plan. If you had a 401(k) or 403(b) plan, you would typically make the match to the same plan, but only the pretax employee contributions, not the match, would be subject to the 402(g) limits. By contrast, all contributions to a 457(b) plan are subject to the limit of 457(b)(2). Thus, if you made the matching contributions to the 457(b) plan, a participant would be able to contribute less to the 457(b) plan. And the fact that matching contributions kick in only at the 4% level would potentially be an issue for a nongovernmental plan due to Code sections 401(a)(4) and 401(m). However, a governmental plan is not subject to either of those sections.

The statute of limitations is pretty much irrelevant for a governmental plan. Under News Release IR-1869, IRS will not attempt to tax trusts under governmental plans on their income, regardless of whether the plan is qualified. (The provisions of that News Release relating to nondiscrimination rules have been rendered obsolete by subsequent legislation, but the part relating to the taxability of the trust has not.) And of course, governmental employers are not worried about deductibility of contributions. So the issues are: Taxability of participants (both on vested contributions to the plan, and on receipt of distributions) Employment taxes of the employer And for these issues, you'd look at the SOL that applies to the participant's return or to the employer's employment tax return.

There is some guidance at this link.

DOL interprets its own regulation to say that you can comply with both. Field Assistance Bulletin No. 2007-02. But you're right that employers are really having to thread the needle here. A big part of the problem is that 403(b)s didn't really develop as employer plans. When they started, it was basically annuity issuers (not custodial accounts at all) going around to employers and saying, "We can offer your employees something that is not only at at no cost to you, but produces an employment tax benefit to you (back before 3121(v)), if you just agree to handle deducting the money from paychecks and sending it to us." The employer signed on to this, without ever contemplating whether there were other companies doing the same thing that might produce better returns for employees. Given this history, I don't think the DOL has a lot of interest in trying to suddenly force all of these plans into fiduciary compliance. So they are twisting themselves in knots trying to find a way to preserve the exemption.

Thanks! The impression I get is that the law on the subject is muddy, and that employers vary in what they do, but that DOL hasn't been going after those who don't file auditi reports.

Thanks! It's now up at my site, with the usual credit to you.

Requiring compliance with the statutory requirements relating to withdrawals/distributions will not cause the rule that "all rights under the contracts & custodial accounts are enforceable only by the participant" to be violated. Otherwise, no plan could comply with both the 403(b) requirements and the non-ERISA plan requirements. The bigger issue would be whether anything in the contract would cause more than limited employer involvement. There are two ways you get to be a non-ERISA 403(b) plan: The employer is governmental, or a nonelecting church, or The plan meets the requirements of 29 CFR § 2510.3-2(f). If the plan meets either of these requirements, it is not subject to ERISA, and thus need not file a Form 5500. If the plan is a governmental or nonelecting church plan, you don't need to worry about 29 CFR § 2510.3-2(f). Otherwise, you need to make very sure that the employer does not do anything more than is permitted by 29 CFR § 2510.3-2(f). For example, if the employer were determining the availability of hardship withdrawals, you could have an issue under 29 CFR § 2510.3-2(f). For that very reason, non-ERISA 403(b) plans typically require the provider to comply with the legal requirements in order to be allowed to sell contracts under the plan. Given the fact that "limit[ing] funding media or products available to employees, or annuity contractors that may approach the employees, to a number and selection designed to afford employees a reasonable choice in light of all relevant circumstances" is permissible under 29 CFR § 2510.3-2(f), limiting providers to ones that agree to comply with the law seems the safest course.

Your projections are always so helpful! Any ideas on: elective deferrals? HCE?

Yeah, but if you are counting on 2520.104-44(b) to say than an audit is not required, the following language in Technical Release No. 1992-01 would say 2520.104-44(b) does not provide an exemption: In this case, participant contributions are not applied toward the payment of premiums. (The plan being self-funded, there are not premiums.) So unless Technical Release No. 1992-01 provides additional relief, the audit report is required.

I have what seems to me like a very simple question that must come up every day of the week, but I'm getting totally bogged down. Here's the situation: Employer has self-funded health plan. Participants make pre-tax contributions. Plan has thousands of participants. Other counsel I'm dealing with is telling me that the plan doesn't have to file an audit report with its Form 5500, because the plan is unfunded. But I'm not 100% sure an exemption applies, and would like to figure out what others are doing. Here is what I've found: ERISA § 103(a)(3)(A) provides the general requirement of an audit report. 29 CFR § 2520.104-44(b)(1) provides an exemption for an employee welfare benefit plan under the terms of which benefits are to be paid solely from the general assets of the employer or employee organization maintaining the plan. However, "the exemptive relief would, in the absence of additional relief, be available only to those contributory welfare plans which apply participant contributions toward the payment of premiums in accordance with the terms of the regulations." Technical Release No. 1992-01. Since the plan is self-funded, participant contributions are not used to pay premiums, so the 29 CFR § 2520.104-44(b)(1) exemption does not apply. Thus, if there is an exemption, it must come from Technical Release No. 1992-01, which states as follows: However, I can come up with two possible interpretations of the above language. Does it mean: The first paragraph applies only if the plan contributions consist entirely of participant cafeteria plan contributions. If the plan also has employer contributions, then there is an exemption only if the second paragraph applies (i.e., the plan is insured). The first paragraph applies if all of the participant contributions are cafeteria plan contributions, regardless of whether there are also employer contributions. To be honest, neither interpretation makes a lot of sense to me. With regard to the first interpretation, if a plan with only participant contributions would be exempt, and a plan with only unfunded employer contributions would be exempt, why would putting both of them into the same plan eliminate the exemption? But with regard to the second interpretation, why would having participant contributions be cafeteria plan (pretax) contributions be different from having them be after-tax contributions?