Carol V. Calhoun

The nondiscrimination rules of 403(B) plans, except as regards salary reduction contributions, are identical to those for qualified plans. See Code section 403(B)(12)(A)(i), which specifically cross-references the Code sections covering nondiscrimination by qualified plans. Of course, if you have a state or local governmental plan, it may be exempt from at least most of the nondiscrimination rules, regardless of whether it is a 401(a) or 403(B) plan. ------------------ Employee benefits legal resource site

A couple of additional comments: a 403(B) does not require either discrimination testing (except for the universal availability rule for salary reduction contributions) or Forms 5500 if it is a governmental or church plan. If it is not, then JWBrown has provided a summary of the ERISA coverage rules. Note, however, that the 403(B) nondiscrimination rules for salary reduction contributions are much less onerous than the comparable 401(k) rules, as they require only universal availability, not ADP testing of actual contributions. ------------------ Employee benefits legal resource site

No, there could be a range of permitted contributions. But the one-time irrevocable election rules would then apply not only to the decision, but as to the level of contributions. For example, suppose that a plan permitted contributions equal to 2, 3, or 4 percent of compensation. A participant could make a one-time irrevocable election to contribute at a 3 percent rate. However, the participant could not thereafter switch to a 2 or 4 percent rate, and could not cease to participate at all. ------------------ Employee benefits legal resource site

A good question, but unfortunately one which does not, to my knowledge, have a clear answer. Only recently have 457 plans had trusts which were treated for tax purposes as entities separate from the employer. (And even now, only governmental plans have such trusts; plans of nongovernmental tax-exempts do not.) So long as the trust was treated as part of the assets of the employer, it was simple enough for the employer just to take mistakenly contributed money back. Now, for governmental 457 plans, we have a situation in which the plan must have a trust. The statute indicates that such a trust is subject to exclusive benefit rules. However, it is not clear whether those exclusive benefit rules include the same exceptions as would apply to a qualified plan under Code section 401(a)(2). ------------------ Employee benefits legal resource site

One of the difficulties here is determining how large the market is for such plans. For many providers, it makes sense to draft a form ERISA document, because the potential market for that is very large -- and in fact, as you point out, includes even governmental plans which use ERISA-based documents. Thus, the cost per potential client for devising a plan is correspondingly small. The market for a non-ERISA plan is, of course, much smaller, and thus the cost/benefit ratio for the provider is much less favorable. So far, at least in my firm, we have not found enough of a market to make it economically feasible to develop a prototype, even though the bulk of our work is for governmental employee benefit plans. ------------------ Employee benefits legal resource site

The cite is really 414(h)(2) itself, which states that the contributions are treated as if they were employer contributions. Thus, they are part of annual additions if and only if they would be part of annual additions if the employer had made them without salary reductions. For example, an employer contribution to a defined benefit plan would not normally be treated as part of annual additions, unless the contribution was credited with actual trust earnings (and therefore would be treated as made to the defined contribution portion of a hybrid defined benefit/defined contribution plan). Obviously, this is a gross simplification, and you'd need to consult the regulations under 415 to determine when an employer contribution is and is not treated as part of the annual addition. But the general rule is that a picked-up contribution is treated just the same as an employer contribution would be for annual additions purposes. ------------------ Employee benefits legal resource site

So long as there is only one employee, the nondiscrimination rules should not be an issue. ------------------ Employee benefits legal resource site

Because this is an ERISA plan, it should be subject to the same fiduciary rules as a 401(k) plan. ------------------ Employee benefits legal resource site

Try clicking on this link to get resources on the DB/DC issue from a governmental plans perspective. ------------------ Employee benefits legal resource site

We've looked at this, and it does not appear that there is a governmental exception to the 401(h) rules. Anyone else found one? ------------------ Employee benefits legal resource site

For a more direct link to the RFP, you can click here. This document requires the free Adobe Acrobat Reader to read or print. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 05-02-2000).]

Well, typically it would have to be the employer which would require plan participation as a condition of employment. However, in the case of a statewide plan embodied in a statute, the difference may not be meaningful, because the state statute would govern the employer (the state and/or local governments) as well as the plan itself. From an IRS perspective, there is no problem at all with making plan participation a condition of employment. However, you need to check applicable state and local law carefully. States may, for example, have laws stating that no amounts may reduce an employee's paycheck unless the employee voluntarily consents to them. Under such circumstances, it may be better to have plan participation something as to which employee's make an irrevocable choice at the time of first employment, rather than making it something which is required as a condition of employment. Either approach works from an IRS perspective. ------------------ Employee benefits legal resource site

Have you checked out the recent IRS Coordinated Issue Paper on this topic? ------------------ Employee benefits legal resource site

In the original question, the statement was made that although the new employer was making MEA calculations, the old employer's plan was a "defined contribution plan." Because there were no references to it being a 403(B) plan, or to the old employer doing MEA calculations, I made the assumption that the old plan was a 401(a) or 403(a) plan, not a 403(B) plan. (Note that it is not the status of the employer, but the type of plan, which is relevant.) Moreover, there are special rules if the employee makes a C election under the new employer's plan.) The situation would indeed be different if both the old and new plans were 403(B) plans. Because 403(B) plans are treated as if they were maintained by a business controlled by the participant for 415 purposes, two 403(B) plans for the same participant would indeed have to be combined for 415 purposes. Nevertheless, this situation does not require an extensive exchange of information between the two employers. This is because the 415© limit is equal to the lesser of 25% of compensation or $30,000. Thus, if the first plan has put no more than 25% of the compensation received from the first emplyer into the plan, and the second employer has put no more than 25% of the compensation received from the second employer into the plan, the limit will not be exceeded unless the aggregate contribution exceeds $30,000. The participant or the prior employer should be able to certify (a) whether the old plan was a 403(B) plan, and (B) what the total dollar amount of contributions to it for the current year was.

Sorry, got off on a tangent here. Yes, we have looked at the issue, and agree with you. ------------------ Employee benefits legal resource site

I think you bring up a good point, JWBrown. Often, people get so worried about the tax consequences of plans that they forget about the economic consequences, which are far more important. In this situation, the tax law would permit either the transfer of the amounts or their retention in the existing contract. The participant's decision, however, will depend primarily on economic factors, such as surrender charges, relative rates of return of the contracts, length of time the participant anticipates holding the contract, etc. ------------------ Employee benefits legal resource site

Well, I'm still here, so maybe I can comment on that I do not believe that the DROP benefits can be treated as a "transfer from one component plan to another." The defined benefit component of the plan does not have any liability to pay that year's benefit distribution if the employee is still working. Indeed, the previous actuarial funding for the defined benefit portion of the plan will have been based in part on an assumption that not every employee will retire at the earliest possible time. The employer contributions in the past will have been reduced to reflect the actuarial advantage to the plan when some employees stay later than normal retirement date. Thus, the DROP component involves the creation of a new liability (one measured by an annual contribution plus earnings based on the performance of a defined contribution account) with new funding, not the transfer of a liability from the defined benefit component of the plan to the defined contribution portion. The DROP feature also involves employer contributions to fund that new liability, assuming that there are any contributions to the defined benefit plan as a whole. In calculating the actuarially required contributions to fund the plan, the actuaries must count both the defined contribution and defined benefit liabilities. The liability on the defined benefit side is measured by the present value of the future benefit to be paid, taking into account turnover, mortality, earnings, and other assumptions. But the liability on the defined contribution side is exactly equal to the contribution. Thus, if the employer continues the same level of contributions it has made in the past, what it is really doing is lowering the contributions to the defined benefit component, and making new contributions to the defined contribution component. Even if there are no contributions to the plan, you may still have an annual addition if the funding is coming from forfeitures by other employees. As you know, forfeitures as well as contributions are annual additions. The one area in which arguably there are no annual additions arises when the plan is overfunded, and surplus is used to fund the benefit. However, in the private employer context, the IRS has treated a transfer of assets from a defined benefit plan to a defined contribution plan as representing the termination of a portion of the defined beneefit plan, a reversion of assets to the employer, and then a recontribution of the same assets to the defined contribution plan. Obviously, there remain questions as to <nobr>(a) whether</nobr> this reasoning would apply to a public plan, and <nobr>(B) whether</nobr> it would apply to a transfer between components in a single plan, as opposed to a transfer between plans. However, I don't believe it is 100% safe to assume even where there are no employer contributions to the plan that there is no annual addition. ------------------ <A HREF="http://benefitsattorney.com" TARGET="_blank">Employee benefits legal resource site</A>

A ruling issued today dealt with a situation in which two departments of the State of Idaho had had 401(k) plans grandfathered by the Tax Reform Act of 1986. It holds that the state can now adopt a 401(k) plan which covers not only all of Idaho state government, but also political subdivisions of the state. The ruling treats the state and its political subdivisions as being part of one "employer." This ruling can be helpful in extending 401(k) plans to governmental employers which might otherwise appear to be barred from adopting them. It could also be useful on the general question of "who is the employer" in the context of a governmental plan. Although the ruling has not yet officially been published by the IRS, you can see a copy by clicking on the above link. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-20-2000).]

A ruling issued today dealt with a situation in which two departments of the State of Idaho had had 401(k) plans grandfathered by the Tax Reform Act of 1986. It holds that Idaho can now adopt a 401(k) plan which covers not only all of state government, but also political subdivisions of the state. The ruling treats the state and its political subdivisions as being part of one "employer." This ruling can be helpful in extending 401(k) plans to governmental employers which might otherwise appear to be barred from adopting them. It could also be useful on the general question of "who is the employer" in the context of a governmental plan. Although the ruling has not yet officially been published by the IRS, you can see a copy by clicking on the above link. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-20-2000).]

Obviously, this is primarily a question of interpreting a state statute, and since I don't even know which state is involved, I can't comment. However, like you, I would be troubled by this interpretation. Does the general counsel also believe that the state law would prohibit mandatory after-tax contributions to the plan? Since those contributions also come out of an employee's paycheck, I would wonder if the treatment of the two types of contributions is different. In the case of picked up contributions, would it matter whether the contributions were picked up pursuant to salary reductions, as opposed to in lieu of salary increases? Does the state otherwise regulate the compensation of these employees, or might there by a way to simply modify pay schedules downward (or avoid pay increases) and then have the employer pay these amounts on a separate, "employer-pay-all," basis without any formal salary reduction basis? From my point of view, there is really no difference between a salary reduction pick-up in which the salary reduction is mandatory, and a situation in which an employer has a lower pay schedule overall but makes employer contributions. Thus, so long as the reduced salary meets minimum wage requirements, and any other applicable legal requirements, it is hard to see how employees are disadvantaged by using the first method rather than the second. However, I am also aware that state legislatures are not necessarily sophisticated about sophisticated economic concepts. ------------------ Employee benefits legal resource site

She's got a couple of options. One would be to leave the old contract in place and have only contributions under the new employer's plan go to the new contract. It is indeed legal to have multiple 403(B) contracts in this situation. Another would be to roll the money from the first contract to the second, if she would like to be able to consolidate all her 403(B) money in one place. ------------------ Employee benefits legal resource site

Since posting the message above, I have become aware that at least one firm, Carruth & Associates, provides 403(B) software which is customized to the employer, and takes into account its specific other plans. Obviously, I cannot endorse any specific software. However, I have been called upon to give legal advice to this company, and I have been struck by its attention to detail on both the mathematical and legal aspects. ------------------ Employee benefits legal resource site [This message has been edited by CVCalhoun (edited 04-18-2000).]

Thanks, Kirk! ------------------ Employee benefits legal resource site

Just call me speedy!

So long as the state statute does not limit its application to certain laws (e.g., only state laws), and the special district has the authority to adopt a plan, I would think that such a local ordinance would apply. We have actually, in reference to service-connected disability benefits (which also must be paid under a law) taken an even broader view of the definition of "law," including for example a plan document embodied in regulations under a general enabling statute permitting plan trustees to adopt a plan. ------------------ Employee benefits legal resource site