Everett Moreland

Some time ago I read the 403(b) regulations to confirm my guess that, as you say, a plan document is required only as a condition of tax-deferred contributions. For reasons I don't remember, I decided that the 403(b) regs can be read to the contrary. My guess is that the safe way to satisfy the plan document requirement for a non-ERISA 403(b) plan that will not receive contributions after 2008 and will not terminate in 2008 is to adopt the IRS model 403(b) plan, modify the plan to not allow contributions after some date in 2008, and comply with plan section 7.3 and section 8.01 of RP 2007-71 for all the insurers and custodians who received contributions after 2004. My understanding is that the IRS will not disqualify a 403(b) plan based on an inconsistency between the plan document and a contract or account described in section 8.01 of RP 2007-71 if (1) the employer satisfies the requirements in section 8.01 for the contract or account and (2) the plan includes the override language in model plan section 9.8. The following from section 8.01, while not clear to me, can be read to condition satisfaction of section 8.01 on the employer's adoption of a plan document: "the contract will not fail to satisfy § 403(b) for the year merely because the contract is not part of a written plan that satisfies § 1.403(b)–3(b)(3) of the 2007 regulations if the employer makes a reasonable, good faith effort to include the contract as part of the employer’s plan that satisfies § 1.403(b)–3(b)(3) of the 2007 regulations."

Based on the following, I think paying within 30 days after death is good faith compliance where the agreement does not provide a payment date. It also might be the case under local law that, where the agreement does not provide a payment date, the payment is due upon death. From Notice 2005-1 Q&A-19(b): "For example, if an employer retains the discretion under the terms of the plan to delay or extend payments under the plan and exercises such discretion, the plan will not be considered to be operated in good faith compliance with § 409A with regard to any plan participant." From Notice 2007-86, section 3.01(B)(1).01: "For example, if an employer retains the discretion under the terms of the plan to delay or extend payments under the plan in a manner that violates section 409A and exercises such discretion, the plan will not be considered to be operated in good faith compliance with section 409A with regard to any plan participant." From 1.409A-3(b): "A plan may also provide that a payment, including a payment that is part of a schedule, is to be made during a designated period objectively determinable and nondiscretionary at the time the payment event occurs, but only if the designated period both begins and ends within one taxable year of the service provider or the designated period is not more than 90 days and the service provider does not have a right to designate the taxable year of the payment (other than an election that complies with the subsequent deferral election rules of § 1.409A-2(b))."

I doubt that a matching contribution to a nonqualified plan is a matching contribution for purposes of the contingent benefit rule. See the definition of matching contribution in 1.401(m)–1(a)(2). See also the following 1.401(k)-1(e)(6)(iv): "Except as otherwise provided in paragraph (e)(6)(iii) of this section, participation in a nonqualified deferred compensation plan is treated as contingent for purposes of this paragraph (e)(6) to the extent that an employee may receive additional deferred compensation under the nonqualified plan to the extent the employee makes or does not make elective contributions."

They have not been proposed

Look at 401(a)(26) Consider whether the selection of the individuals eligible to make the election is consistent with the ADEA

To answer a question you did not ask, you might look at how FICA applies after conversion to a DC plan. I looked at this recently (can't remember the facts or my conclusions) and remember being mystified.

See the following 1.403(b)-10(f): (f) Defined benefit plans—(1) Defined benefit plans generally. Except for a TEFRA church defined benefit plan as defined in paragraph (f)(2) of this section, section 403(b) does not apply to any contributions or accrual under a defined benefit plan. (2) TEFRA church defined benefit plans. See section 251(e)(5) of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97–248, for a provision permitting certain arrangements established by a church-related organization and in effect on September 3, 1982 (a TEFRA church defined benefit plan) to be treated as section 403(b) contract even though it is a defined benefit arrangement. In accordance with section 403(b)(1), for purposes of applying section 415 to a TEFRA church defined benefit plan, the accruals under the plan are limited to the maximum amount permitted under section 415© when expressed as an annual addition, and, for this purpose, the rules at § 1.402(b)–1(a)(2) for determining the present value of an accrual under a nonqualified defined benefit plan also apply for purposes of converting the accrual under a TEFRA church defined benefit plan to an annual addition. See section 415(b) for additional limits applicable to TEFRA church defined benefit plans.

Koert v GE Group Life Assurance Company deals with this. The court's opinion is here http://vls.law.villanova.edu/locator/3d/Feb2007/054892np.pdf

I've not run your first two questions through the 409A regulations, but I can think of nothing in them that prohibits paying different amounts upon different events or types of separation (and I've drafted 409A agreements that do that). The definitions of the different types of separation need to differentiate them in a manner that satisfies the following requirements: 1. From 1.409A-1©(3)(i): "The material terms of the plan include the amount (or the method or formula for determining the amount) of deferred compensation to be provided under the plan and the time and form of payment." 2. From 1.409A-3(i)(1)(i) (if the payment is subject to these rules): "Amounts are payable at a specified time or pursuant to a fixed schedule if objectively determinable amounts are payable at a date or dates that are nondiscretionary and objectively determinable at the time the amount is deferred. An amount is objectively determinable for this purpose if the amount is specifically identified or if the amount may be determined at the time payment is due pursuant to an objective, nondiscretionary formula specified at the time the amount is deferred (for example, 50 percent of a specified account balance)." As to your third question, the answer is in 1.409A-3©, Designation of alternative specified dates or payment schedules based upon date of permissible event. The drafting might be complex, for example if after age 65 there is a change in control or the employee is terminated for cause.

I emailed the same question to the IRS and was told that a 415(m) excess plan can be excess to a defined contribution 403(b) plan, even where participants in the 403(b) plan also participate in the employer's defined contribution 401(a) plan in which they do not hit the 415 limit.

Revenue Ruling 71-91, which holds that a pay-as-you-go plan (under which the employer pays benefits directly) is not a qualified plan, states: "Thus, a qualified plan must be a funded plan. It may not provide for direct payments by an employer to his employees, as in the case of the pay-as-you-go pension plan described in this case." The above, plus the following from PLR 200745022, can be read to indicate that benefits eligible for rollover must be paid from plan assets: "In this case, the above-referenced escrow account will eventually hold amounts due Plan X participants and payable to them because of Settlement Agreement X and earnings thereon. Under the particular facts of this case, it is appropriate to treat the escrow account as an entity set up solely to hold Plan X assets for the purpose of distributing said assets to Plan X participants as soon as administratively feasible." I doubt that payment directly by the employer would be treated as a payment from plan assets. I don't see the purpose of an escrow account in this situation. An escrow account established as a plan asset seems to me to be substantially the same as a bank account in the name of the plan trustee.

Andy: My post is misleading if it gives the impression I know the answer to your question. I don't know whether the reason for the escrow account relates to the court proceeding or to requirements for treating the settlement payments as from a qualified plan.

In PLR 200745022, at http://www.irs.gov/pub/irs-wd/0745022.pdf, which involves a somewhat similar situation (settlement of a lawsuit over benefit underpayments from a terminated defined benefit plan), the taxpayer made the following representation about terminated Plan X: "It has been represented that, in order to make the distributions from the above-referenced escrow account, Plan X will be updated to comply with current Code section 401 (a) qualification requirements."

ERISA section 206(a) is comparable to IRC section 401(a)(14) and would apply if ERISA applies to the 403(b) plan.

Can a 415(m) excess plan be excess to a defined contribution 403(b) plan? I would appreciate your insights and comments. IRS Private Letter Ruling 200148054 approved a 415(m) excess plan that was excess to a defined contribution 403(b) plan. IRS PLR 200526025 approved a 415(m) excess plan that was excess to a defined contribution 401(a) qualified plan. My concerns are: 1. IRC Section 415(m) appears to allow a 415(m) excess plan to be excess to only a defined benefit plan. 2. The April 5, 2007, final Treasury regulations under IRC Section 415 state that a 415(m) excess plan can be excess to a defined benefit plan but are silent on whether a 415(m) excess plan can be excess to a defined contribution plan. 3. For 415 purposes a 403(b) contract is treated as maintained by the employee, not the employer. Participants in the 403(b) plan also participate in the employer's defined contribution 401(a) plan, in which they do not hit the 415 limit.

The following recent IRS PLR and U.S. Tax Court opinion deal with exclusion of a governmental plan disability pension under IRC Section 104(a)(1): http://www.irs.gov/pub/irs-wd/0809011.pdf http://www.ustaxcourt.gov/InOpHistoric/Tateosian.TCM.WPD.pdf

The following from 1.411(d)-4(b)(2)(ii) suggests that changing the designation of which JSA is the QJSA is not a cut back: "A plan that provides a range of three or more actuarially equivalent joint and survivor annuity options may be amended to eliminate any of such options, other than the options with the largest and smallest optional survivor payment percentages, even if the effect of such amendment is to change which of the options is the qualified joint and survivor annuity under section 417." Allowing the participant to choose among the JSA options without spousal consent should avoid any concern about a cut back.

If the 403(b) plan is funded by an insurance company annuity contract (as distinguished from a mutual fund custodial account), the final 403(b) regulations require the plan to offer an annuity. See the following from 1.403(b)-2(b)(2): "Annuity contract means a contract that is issued by an insurance company qualified to issue annuities in a State and that includes payment in the form of an annuity." As to whether an ERISA 403(b) plan is a profit sharing plan and so not required to offer a QJSA, I've seen no DOL guidance. A 1995 CCH publication (Working with Tax Sheltered Annuities, Report 1066, Issue No. 1130, July 14, 1995, Extra Edition), states, on page 13: "TSAs are generally money purchase plans . . . and, accordingly, are . . . subject to ERISA Sec 205 [which has the QJSA rules]." What I have done is state in the plan document that the 403(b) plan is a profit sharing plan. This works for qualified plans, so I assume it works for 403(b) plans.

My experience with the IRS on nonamender VCP submissions is that (1) the IRS accepts submissions where some very old plan documents are missing and (2) the IRS does not asked why prior timely amendments are defective. I think that in VCP the IRS generally operates on the assumption that an amendment is defective if you say it is.

Peter: You might consider submitting under VCP as a nonamender. I have submitted plans established in the 1960s, and that have not received an IRS determination letter, under VCP as nonamenders. The VCP application will state that the plan has not been timely for any IRC provision since the plan was established, even though the plan has been timely amended for some IRC provisions. I submit on the assumption that if an amendment does not have a determination letter then the amendment is defective. The IRS has dealt very reasonably with these and the process has worked very well.

At 1.411(d)-4 Q&A-12 is an example of how to increase normal retirement age without giving a 204(h) notice. This is also discussed in the preamble, 72 Federal Register 28604, 28605-06 (May 22, 2007).

IRS PLR 9645031: "The Plan [a governmental plan] is not subject to the provisions of Code section 411, including section 411(d)(6) which prohibits, among other things, reductions in the accrued benefits of participants by plan amendment. "

Disability pensions can sometimes be excluded from gross income under IRC Section 104(a)(1). Yesterday the U.S. Tax Court decided the most recent case under Section 104(a)(1). You can get that case here http://www.ustaxcourt.gov/InOpHistoric/Tateosian.TCM.WPD.pdf

Another question that needs to be answered is whether the provision in RR 57-163 allowing an employee to withdraw mandatory employee contributions on discontinuance of participation applies where the remaining benefit is transferred to another pension plan of the employer in which the employee participates.

I found the answer to my own question and maybe the answer to the original question. Revenue Ruling 57-163, Part 2©(2), declared obsolete in Revenue Ruling 72-488, allows a participant to make an in-service withdrawal of mandatory employee contributions on discontinuance of participation in a pension plan: "A pension plan may provide incidental benefits prior to normal retirement, such as disability and death benefits, but if it permits participants, prior to severance of employment or termination of the plan, to withdraw all or part of the funds accumulated on their behalf, except their own contributions on discontinuance of participation, in times of financial need or otherwise, it will fail of qualification." Later revenue rulings cite this statement. Maybe the rule is that "withdraw" means on the employee's initiative, or with the employee's consent, so maybe the quoted statement allows distribution of mandatory employee contributions on discontinuance of participation only if the employee consents. Maybe reading the later rulings that cite this statement will answer that question.