If Governments are subject to...

[Guest STLGiant]

discrimination regs under 401(a)(4), 410(B), and the like after 2003, how will that effect the arrangements sold by several insurance/annuity and custodial account vendors.

Specifically, I'm thinking of one-time irrevocable elections which are deemed employer contribution, not employee deferrals subject to 402(g).

I understand the "discrimination" regs. (LOL) for non-ERISA 403(B) plans is that an eligible employee is eligible for one 403(B) arrangement or another.

Ergo, the 403(B) arrangement that holds employer contributions (one-time irrevocable elections) has just the superintendents (HCEs) and the other 403(B) is salary deferral elections with everyone in it.

Will this arrangement fly in 2003 if governments are subject to the discrimination rules? Assume for purposes of this question that the arrangement could not be cross-tested.

[Carol V. Calhoun]

State and local governments will still be exempt from nondiscrimination rules (other than the universal coverage rule for salary reduction 403(B) contributions) after 2003. Thus, this issue would apply only for purposes of other types of governmental plans (e.g., a school run by the federal government). And I suspect that before 2003, there will be technical corrections legislation that will eliminate the nondiscrimination rules for all governmental plans.

[Guest STLGiant]

Carol, would you please expand on this? Why would they still be exempt? Would the legislative change required to make governments subject to discrimination be a change in the ERISA section that mandates no compliance by governments?

or

Can the Code pull them in under that what is it 403(B)(12) the section that's empty and points to 89-23 (I think...)?

[Carol V. Calhoun]

Section 403(B)(12) is not empty. It provides the nondiscrimination rules for 403(B) plans, and includes the following language:

(12) Nondiscrimination requirements

(A) In general  For purposes of paragraph (1)(D), a plan meets the nondiscrimination requirements of this paragraph if--

(i) with respect to contributions not made pursuant to a salary reduction agreement, such plan meets the requirements of paragraphs (4), (5), (17), and (26) of section 401(a), section 401(m), and section 410(B) in the same manner as if such plan were described in section 401(a)...

...

© State and local governmental plans. For purposes of paragraph (1)(D), the requirements of subparagraph (A)(i) (other than those relating to section 401(a)(17)) shall not apply to a governmental plan (within the meaning of section 414(d)) maintained by a State or local government or political subdivision thereof (or agency or instrumentality thereof).

Thus, state and local governmental plans have a statutory exemption from the nondiscrimination rules of Code section 403(B)(12)(i).

Governmental plans other than state and local governmental plans do not currently have a statutory exemption from nondiscrimination rules. However, they have been provided with an administrative exemption under Notice 2001-46. The exemption states as follows:

[T]his notice provides that certain governmental plans shall be deemed to satisfy §§ 401(a)(4), 401(a)(26), 401(k)(3), and 401(m) of the Code until the first day of the first plan year beginning on or after January 1, 2003.

Thus, if no further action is taken, governmental plans other than state and local governmental plans will become subject to 403(B)(12)(i) upon the expiration of the period described in the notice.

The one exception would be with respect to the nondiscriminatory coverage rules of section 410(B), as incorporated by reference in section 403(B)(12)(i). Under section 410©, all 401(a) governmental plans (not just state and local governmental plans) are exempt from section 410(B). To the extent that section 403(B) requires that 403(B) plans comply with

section 410(B) in the same manner as if such plan were described in section 401(a)...

it would appear that a governmental 403(B) plan (which would not be subject to 410(B) even if it were described in section 401(a)) should not be subject to 410©-type requirements.

[Guest STLGiant]

Thanks for the clarification Carol!