Carol V. Calhoun

I would agree with Harvey on this one. This is something of a trap for the unwary. Section 415© was recently amended so that most salary reduction contributions (e.g., 403(B) and 401(k) contributions) can be included in income for purpose of calculating the 25% of compensation limit of section 415©. Many people forget that the same is not true of 414(h)(2) ("picked up") contributions. Thus, the largest possible picked up contribution to a defined contribution plan is 20% of the compensation before the salary reduction. For example, if you start out with compensation of $50,000, the maximum contribution would be $10,000, because the contribution is at that point 25% of the compensation remaining after the contribution (%50,000 minus $10,000, or $40,000).

Historically, not great. But then again, as one whose college money got seriously diminished by fairly long-term declines in the stock market back before the dawn of time (late 60s, early 70s), I tend to take the cautious approach.

Here's a link to Rev. Rul. 2000-35, in case you are interested.

You might look at the 403(B) exclusion allowance regulations. They provide a mechanism for former employees to continue to have an exclusion allowance. Of course, in order to avoid section 415 problems, either the contributions would have to be made in the same limitation year in which the individual was last employed or the A or B election (if available) would have to be made. One issue with severance pay, however, is whether the pay was already earned at the time the salary reduction election was made--in which case, the election could not apply to it. A way around this is to have the superintendent greatly increase the salary reduction contributions while still employed, so as to reach the maximum before severance of employment. The severance pay could be counted as compensation, even if the contributions could not be made out of it.

Well, this is one of those questions which many people have debated, but which has no clear answer. We typically advise our clients that the safest approach is to assume that adding a match will trigger the ERISA requirements.

Yes. The profit sharing and matching contributions need merely comply with the nondiscrimination requirements of Code sections 401(a)(4),401(m),410(B), etc. The universal availability requirement applies only to salary reduction contributions. See Code section 403(B)(12).

You might want to try posting this one on the Church Plans message board. My former partner Danny Miller, who moderates that board, has a lot of experience with what is and is not compensation in the case of church 403(b) plans.

The authority is Internal Code section 403(B)(7). I don't have the exact date on which that was added to the Code, but it's at least 20 years ago.

I would be a bit cautious about using ERISA language in a governmental plan. First place, inclusion of such language is not necessary in order to get an IRS determination letter for a governmental plan. Over the past 20 years, I have gotten numerous determination letters for governmental plans which complied only with those Internal Revenue Code requirements which apply to governmental plans, and not with other Code or ERISA requirements which would apply to private plans. Second, in some instances, ERISA requirements may conflict with state law requirements. For example, routine ERISA language concerning vesting or termination of a plan may conflict with state court holdings that a governmental plan is forbidden by the state constitution from ever terminating or cutting back on future benefit accruals for existing employees. State laws concerning domestic relations orders may require a governmental plan to comply with an order that would not meet the requirements of a qualified domestic relations order. State laws concerning the investments of a governmental plan may forbid or require certain investments, in a way that would be incompatible with ERISA requirements.

Unless this is forbidden under applicable state or local law, it is perfectly permissible. Disability may be a distributable event, if the plan so provides, but is not required to be.

Governmental plans other than state and local government plans would include plans of federal government agencies and international organizations.

These sections (other than 401(B)) are definitely inapplicable to state and local governmental plans. However, they are technically applicable to governmental plans other than state and local governmental plans. (Technical corrections legislation is expected to extend the relief to all governmental plans.) Perhaps this is the source of the confusion?

Tell me about it! Most of my work is with governmental plans. And in a whole lot of areas, governmental plans are subject to pre-ERISA law. Managing to go back and research that law at this stage (much less apply it to a world that's changed a lot since 1974) is one of the challenges of my profession!

From informal conversations with people at the IRS, it appears that they are as a practical matter using 1,000-hour test, at least for those employees who remain with the employer for the entire year. This amounts to averaging out their hours over the course of a year. However, you would need to do that calculation on a per employee basis, rather than a group basis. Thus, if one employee in that class regularly works 25 hours a week, and one works 10, you cannot avoid coverage of the whole class because on average they work less than 20.

The question might be easier to answer with some specifics. Which specific sections are you referring to, which were overruled but are still being required?

Section 411(e)(2) by its terms subjects governmental plans to pre-ERISA vesting rules under sections 401(a)(4) and 401(a)(7). However, section 401(a)(5)(G) provides that 401(a)(4) (presumably including the vesting rules thereof) will not apply to state and local government plans. (Other governmental plans are technically not exempt, but it is anticipated that a pension technical corrections or similar bill will exempt them, if such a bill ever passes.) Thus, the only federal vesting rule is pre-ERISA section 401(a)(7), which read as follows: (a) Requirements for Qualification.-A trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall constitute a qualified trust under this section-* * * (7) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, upon its termination or upon complete discontinuance of contributions, under the plan, the rights of all employees to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the amounts credited to the employees' accounts are nonforfeitable. This paragraph shall not apply to benefits or contributions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary or his delegate to preclude the discrimination prohibited by paragraph (4), may not be used for designated employees in the event of early termination of the plan. As you can see, this does not include the vesting rule on normal retirement age. And ADEA merely requires that older people be treated as well as younger people, not that they be treated better, so a vesting schedule which applied to workers of all ages (even those who had passed normal retirement date) would be acceptable. Thus, as you suspected, state and local law would govern this issue.

Yes, assuming the plan language allows for them. The only thing you have to watch out for is that it is my understanding (haven't looked at this recently enough to know if there is authority) that if the elective deferrals come from income which accrued before the date of the election, you have a problem. For example, suppose someone was entitled to an annual bonus at the end of the year, and made an election in December to have the entire 403(B) deferral for the year made out of that bonus. You could have an issue here, because most of the bonus would have been earned before the date of the election. This would not be a problem if the deferral was elected at the beginning of the year, even if it was all taken out of the bonus. Also, the same result might be accomplished by making the deferral out of the portion of the December paycheck which had not yet been earned, and then using the bonus for the living expenses the paycheck would otherwise have covered.

I'm assuming here that this is a plan which is subject to the 1,000 hours standard in the first place (e.g., not a governmental plan. In that case, you need to treat these employees the way other employees are treated by the plan. If other employees do not begin to participate until they have achieved 1,000 hours and/or reached their anniversary date, then these employees would need to be included only prospectively and/or on their anniversary dates. But if other employees are admitted to the plan immediately, these employees should normally be admitted retroactively. It may be possible to amend the plan to avoid this result. For example, if it is a particular category of worker that is likely to be in this situation, you could exclude that whole category of worker until they have reached 1,000 hours, subject to passing nondiscrmination tests. However, it is my understanding that the IRS examiners have in some instances disallowed a category which is too obviously related to temporary or part-time status, if that status does not preclude attainment of 1,000 hours.

The statute you want to look at is ERISA section 3(32), codified at 29 USC 1002(32). In general, if a governmental entity makes contributions to a plan, the status of the plan as a governmental plan depends on whether the individuals it covers are governmental employees, rather than who administers it.

You might want to check out a chart I did, Choosing Among 401(k),403(B), and 457 Plans. (Just click on the title to go to it.) It gives some of the major pros and cons of each.

There is no problem under federal law with the employer doing this. However, it may raise problems under state law. For example, courts have held that Constitutional provisions preclude modification of any employee's future pension accrual rights in a way that is unfavorable to that employee. Thus, if any employee's contribution went up (without a corresponding increase in the benefit), you could have a problem. You would also need to look at applicable state and local law to determine whether they imposed any restrictions on employee contributions, and/or on pick-ups.

Code sections 414(p)(9) and (10) rules do not impose 414(p) on 403(B) plans. Rather, they merely deal with the consequences of a situation in which a 403(B) plan complies with a QDRO based on ERISA section 206(d).414(p)(9) says that the taxation of the distribution will be the same as if it were a 414(p) distribution. 414(p)(10) says that a 403(B) plan will not be considered to be in violation of the restrictions on distributions due to compliance with a QDRO.

Yep, that's my understanding as well.

Yes, that is correct.

I'd agree with you on that one. My original response was based on Gibson's statement that the 403(B) plan in question had employer contributions as well as salary reduction. Thus, it would already be subject to ERISA (barring governmental or church plan status), regardless of what it did with QDROs.