Carol V. Calhoun

That assumes it is a private 501(c)(3). If it's a public school or university, a 401(k) would be unavailable (unless grandfathered).

They would definitely have to allow them to defer. The exclusion based on job classification could apply only to the match.

Section 410(a)(1) sets forth the minimum age and service requirements. In general, a plan cannot require, as a condition of participation, that an employee complete a period of service with the employer extending beyond the later of: the date on which the employee attains age 21; or the date on which the employee completes one year of service. This is separate from the 410(b) requirements. So if an employee gets over 1,000 hours in a year, they cannot be excluded from the match, even if the 410(b) requirements would be satisfied even if they were excluded.

Rev. Rul. 69-545, 1969-2 C.B. 117, is the ruling that permits a municipal hospital to have 501(c)(3) status. If it does, it can have a 403(b) plan. However, that doesn't mean it loses its governmental status. And as a governmental plan, it is not subject to ERISA.

The other "cost" of being a 501(c)(3) is that some very old GCMs say that a governmental entity that obtains 501(c)(3) status becomes subject to UBIT.

Here's the situation. TPA wants to hire its own subsidiary as a care coordinator for the health plans it serves. I'm trying to figure out: Whether we have a prohibited transaction. Whether an exemption applies. Whether the arrangement needs to be mentioned in the TPA agreement. In other words, if the TPA agreement includes care coordination services, must it be separately disclosed that these services are provided through the subsidiary and what portion of the fees go to the subsidiary? It doesn't really seem to me that the prohibited transaction rules should apply in this case. After all, there is no more potential for abuse if the TPA uses a subsidiary for this than if it performs the services itself. However, I'm concerned about Information Letter 1998-02-19 and Prohibited Transaction Exemption 93-62, which treat the selection of health care services as a fiduciary function.

They may well be a non-ERISA plan, but that doesn't exempt them from the universal availability rule of Internal Revenue Code section 403(b)(12), which would preclude a plan that allows for deferrals and doesn't allow everyone to make such deferrals. The only way I can see this working is if everyone is allowed to make deferrals, but that only HCEs want to because those are the only people whose contributions are limited by the ADP test. Or if everyone other than the executives (including those who would normally be excludible from a 401(k) plan) is eligible for the 401(k) plan. That being said, I'm assuming from the fact that they have a 401(k) plan that they are not a governmental plan. In that situation, the only way they could have a non-ERISA plan would be pursuant to 29 CFR § 2510.3-2(f), which provides that certain deferral-only 403(b) plans with minimal employer involvement are exempt from ERISA.

Why would they want to cease that status? As a governmental plan, they don't need to file Forms 990, which is typically the most onerous part of being a 501(c)(3). Do they have potential UBIT issues?

How is a governmental hospital maintaining a 403(b) plan in the first place? The only employers permitted to have 403(b) plans are 501(c)(3) organizations and public schools. Rev. Rul. 69-545, 1969-2 C.B. 117 permits a municipal hospital to apply for 501(c)(3) status, but if it has not done so, it would be ineligible to maintain a 403(b) plan. If this is the case, you'll need to do a VCP submission to fix the situation. If the parent is eligible to maintain a 403(b) plan, but the written plan document is defective in not naming the related 501(c)(3), you might consider amending the plan to be a pre-approved plan. Rev. Proc. 2017–18 allows you to fix most problems, other than the complete absence of a written plan document, by adopting a pre-approved plan before March 31, 2020. As far as the related 501(c)(3) being an agency or instrumentality, that is certainly possible, depending on the relationship of the parties. You might check out the Advance Notice of Proposed Rulemaking on Determination of Governmental Plan Status to determine whether the 501(c)(3) is likely also to be treated as governmental.

Typically, the plans would be merged. The existing contracts (annuity or custodial account) are the property of the individual employees, so they would not be affected. To the extent that they are held under a group contract, the new employer could take over that contract. The old money could just stay where it is. The new money would be subject to whatever investment choices the combined employer plan specified.

Employer contributions are indeed added to employee contributions. The question is whether the employer contributions in this instance would be treated as 2016 contributions or 2017 contributions. The section 415 regulations call for treating required back contributions (e.g., pursuant to a back pay settlement) as relating to the year in which they should have been made, not the year in which they were made. By analogy, you could argue that the contributions here should be treated as 2016 contributions. The problem, of course, is that a) it's probably uneconomic to get a ruling on this, and b) getting a ruling on anything these days is becoming nigh on impossible. So the client would have to recognize that there is some risk.

Yes. Section 403(b)(12) does not include an exception for a plan without HCEs. That makes no sense, as you point out, but it's still there.

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!