Carol V. Calhoun

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?

Sorry, my mistake. IRS had linked to that page as a list of pre-approved providers, and I failed to notice that they were all listed as not yet approved.

I actually linked to a list of those the IRS has approved in my post above. And I agree that interim amendments are not required. My concern is with a plan adopted in 2009 which failed to take into consideration PPA (which was a 2006 statute). I'm not sure that even qualifies as a "good faith" document.

"The IRS is getting ready to approve prototype 403b documents"? It already has approved quite a lot of them. I would agree that if you made a good faith effort in 2009, and adopt a pre-approved plan on some date before the end of the to-be-announced remedial amendment period, you'll get retroactive relief. My concern here is whether a document adopted in 2009 which did not comply with the Pension Protection Act of 2006 can even be considered a "good faith effort."

Surely the 2009 amendment should have taken care of the PPA changes? Short answer is yes, PPA did make some changes to 403(b)s. Here's a link to a TIAA-CREF description of them. And there have been other changes since then, e.g., compliance with the Windsor decision, rollover rules, and HEART Act rules. Of course, this is all complicated by the fact that there is no determination letter program for individually designed 403(b) plans, and even the determination letter program for prototype plans was only established in 2013. However, it is now possible to make a VCP submission for a 403(b) plan. You might consider that in your situation.

Sorry, I'm here! The problem you've got is that there is no program similar to EPCRS for nongovernmental 457(b)s.So you really can't get an answer, until and unless there is an audit. The amount should have been reported on the W-2 in 2009. However, given that both the statute of limitations will have passed on both the employer and the employee, I don't know that you need to do anything about that now. One question is whether you now pay him only the amount that should have been paid in 2009, or some kind of earnings since then. Payment of the earnings could generate a new reporting obligation. As for the plan, in theory the IRS could go after it, but I doubt it would. It's not like a plan with a trust fund, in which tax benefits have been accruing to the plan all these years (due to untaxed earnings on account balances). In the case of a nongovernmental 457(b), the plan for each employee is more or less self-contained. (The tax consequences of one plan for each employee, or one plan for the whole group, would be identical.) So it wouldn't make sense to remove the tax benefits to current employees due to something that happened to a different employee back in 2009.

There is nothing comparable to 409A's change in control provision under 457(f), because the two statutes are structured quite differently. 457(f): Benefit is taxable in all events upon lapse of a substantial risk of forfeiture. 409A: Benefit is taxable upon lapse of a substantial risk of forfeiture only if the requirements of 409A are not met. Among the requirements of 409A is that the benefit be payable on one of several events, one of which is a change in control. So while the definition of substantial risk of forfeiture is similar (though not identical) in 409A and 457(f), the change in control rules in 409A (which have nothing to do with substantial risk of forfeiture) have no application to 457(f).

A 403(b) plan need not have participant investment direction. You're not finding authority on it only because 403(b) sets forth all the requirements, and doesn't include that one. So you're not going to get cases or authorities on the issue of whether it's required, because there is simply no basis for requiring it. That being said, there are two limitations. First, in a nongovernmental, nonchurch plan, there is an exemption from ERISA that applies only if certain conditions are met. See 29 C.F.R. §2510.3-2(f). Among the conditions for that exemption are that employer involvement in investment decisions must be limited to "limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances." So if there is no participant investment direction, the ERISA exemption would not be available to a nongovernmental, nonchurch plan. Second, if the employer makes all the investment decisions, it may have greater potential for fiduciary duty than if participants choose their own investments.

A top hat plan does not have "investments" as such; life insurance, etc. is used only to measure the amount payable from the employer's general assets. So long as the contractual requirements were complied with, there shouldn't be an issue. And I'm assuming that the employees who chose life insurance already know that they did, and that other employees already know that they can't. I'd be a little more concerned about a governmental. They have a formal trust, and cover a broad range of rank and file employees. You'd have to look at state law regarding what disclosure obligations they have. But I'd be inclined to put something in the plan at least saying, "Effective [date], no further investment in life insurance is permitted."

Yes. Regardless of whether they are treated as employer or employee contributions, they count toward the $53,000 limit.

We've got the same "substantial risk of forfeiture" standard in 457(f). And the new proposed regulations under that section impose conditions before a voluntary deferral or rolling risk of forfeiture works, but they allow it in at least some situations. Since 83(b) seems generally to be a more liberal standard than 457(f), you'd think it should also be allowed in 83(b) situations. But I can't find any guidance on the issue.

A hardship withdrawal stamdard is actually a more lenient standard than unforeseeable emergency. It allows for things like tuition, purchase of a home, etc., which are foreseeable. A governmental 401(a) plan can allow for the more lenient hardship withdrawal standard. If it wanted to, it could allow for only unforeseeable emergency withdrawals--nothing prevents you from not allowing withdrawals at all, or imposing a stricter standard than the law requires. It's just a question of them not wanting to.

I don't have a specific citation, but I know IRS officials have in the past been very negative about adding a single employee, as opposed to a class of employees, to satisfy coverage problems. The fear is that you add the lowest paid employee, then make the maximum contribution on behalf of that employee, and you've satisfied your tests at minimal expense, without actually giving meaningful benefits to lower paid employees. Allowing the inclusion of specific employees, as opposed to a class of employees, would also raise the concern that the employer could be quietly imposing, for example, age and service conditions in excess of those permitted, by picking and choosing specific employees to cover. If this is the case even in normal 410(b) testing, it's unlikely the IRS would accept it as a correction method.

Yep, sorry, I was referring to an old post, not old regulations. I've spent the last week mired in these regulations, and my brain is going.

Proposed 457 regs. And yes, I'd agree that anything (match or earnings) that increases the value by more than 25%, and meets the other conditions, would work.

No. A controlled group requires at least 80% ownership in the case of a taxable organization. In the case of a tax-exempt, common control exists between an exempt organization and another organization if at least 80 percent of the directors or trustees of one organization are either representatives of, or directly or indirectly controlled by, the other organization. So regardless of whether we're talking about stock ownership or interlocking boards, neither A nor B would be part of a controlled group with the JOC.