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403(b) contributions by governmental employers


Guest CinANC

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Guest CinANC

I am an HCE (CEO) of a state intermediate education agency. The agency is a state political subdivision organized as a public corporation, e.g., with an autonomous board of directors. I have found conflicting opinions on this question: Are governmental employer 403(B) contributions subject to HCE discrim testing? Can anyone point me to a cite for this question?

I am considering asking my board (in my next employment contract) to reduce my salary by $XXK annually, and direct same to my 403(B) account as an employer contribution, unless this would create HCE discrim problems. I am maxing my elective 403(B), and will also use a new 457(B) plan for maximum elective contributions. If governmental employer 403(B) contributions are exempt from plan discrim testing, they would appear to allow me additional deferrals not otherwise available.

Are there caveats in this scenario, if allowable?

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You need competent advice. What you want to do, as you have described it, is a one-time election and you are not eligible for it because you have already made salary deferral elections under the plan. At least that is the IRS view.

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Guest newlife

I'm not an expert (big caveat) but I don't think the HCE is talking about a one time election. Although He uses the phrase, "reduce my salary by $XXK" I don't think He is talking about a salary reduction - but in effect a repackaging of his compensation. With the effect of freeing up money for the organization to make an non-discretionary employer contribution on his behalf. This employer contribution would not cost the organization anything, because budget-wise it's being offset by a corresponding lowering of the HCE's salary.

Technically, from his organizations point of view, I'm not sure what this decrease in pay would need to be called, but if in fact his organization is exempt from non-discrimination issues, I'm not sure this wouldn't work?

Anyway - just an idea....

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Guest CinANC

I may have stated my scenario poorly, at least for the purposes of IRS determination.

The agency board employs its CEO under time-limited (typically three year) contracts. I will enter into a new employment contract eff: 7/1/02. A new compensation & benefits package will be defined under that contract. The salary and benefits under my prior three contracts have each differed from the other. Regardless of the instant question, the new contract will differ greatly from prior contracts, inasmuch as the board has restructured the CEO position requirements away from participation in the state teacher retirement system. This will allow an eligible incumbent to recieve retiree benefits while employed in the reconfigured position.

With this background, my question meant: If my new contract salary were $XX, could the board also contribute to my 403(B) plan without risk? If so, my contract could reflect $XX in salary and $xx in employer 403(B) contributions. That would be one possible negotiation.

Another negotiation could result in another package, in which the salary total would logically be higher than it might be with a "rich" benefits package. Board negotiations are of course privileged. The signed contract is the only document of record.

I see your point as to the possible adverse construction of intent, but does the added context mitigate this possibility?

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It is all a matter of interpretation. But the issue is always there, especially if you are the only one involved. You have a number of compensation dollars that they will pay you. Some of those compensation dollars are health benefits. Some are take home pay. Some may be deferred compensation. For practical purposes, it is a zero sum game. You may be able to negotiate the total up some, of course, but the current dollars and the deferred dollars are fungible. What kind of negotiation do you envision? If you have a total $100,000 compensation amount, they won't go for $90,000 current plus $20,000 deferred (unless you throw in some vesting requirement). And they won't care if you split the $100,000 in any way between current and deferred because it is all the same to them. So what is the difference between that and a written election to reduce current pay and have the reduction contributed to the plan instead? Answer: One is more difficult to detect than the other.

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Guest CinANC

First, I want to thank you for your observations.... in the spirit of this site, I hope our dialogue may be helpful (or entertaining!?!) to other readers... I know it has me riveted!

Given that your precautions have focused on my constructive intent rather than the HCE discrimination issue, am I correct in inferring that governmental plan HCE discrimination is not a concern?

If so, and per your reply above, your "zero sum solution" could be right on, in a way which might be helpful to me, or not.... as you said, a matter of interpretation. In my next contract, my gross daily salary rate could remain roughly (exactly, if necessary) where it is... but my state retiree benefits will include spouse and dependent health and medical benefits now provided by my employer at a current cost of more than 12K annually.

If rather than "reducing salary", which would be demonstrably equivalent to the current daily rate, I were to negotiate these exisiting benefits costs toward the employer 403(B) contribution rather than uneeded insurance benefits, there would be no salary reduction, hence "no one time election", no?

Am I getting warmer?

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You are getting more expansive in you thinking. The big problem is that anything that is done for you is done for you alone, so it sticks out and automatically brings up the issue. If the employer contribution applied to more than one person and were not individually negotiated, you would have a much better chance of being outside the issue. You may want to do something like this rather than nothing, despite the risks. I think you need competent professional advice. You can reduce risks if you could control the process and reduce the signals, as you have been trying to do. You also have to consider what the employer may think about being involved in the arrangement.

As for the question you asked, you have no problem with an employer funded contribution under discrimination rules if the employer is a government. The reason you may have heard otherwise is that governmental 403(B) plans have to offer elective deferrals to everyone.

Now for a new idea. If your employer is a government and does not have a 457 plan, consider increasing your tax deferred savings that way. $12,000 is availble to you at no legal risk, assuming state law allows the employer to have or participate in a 457 plan. Some states have the plan at the state level and other governments can participate.

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  • 3 months later...
Guest STLGiant

QDRO, a question. Many, many superintendent contracts in the public school district are set up this way. I thought it was based on whether or not you were subject to contractual terms or not which determined whether one could use the one-time irrevocable election? Do you have a cite on something where it says you can't ever do that if you've deferred in the past? I ask since many very prominent ERISA attorneys have done this for years. Thanks in advance for your reply.

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402(g)(3), last sentence. A one-time election has to be made "at the time of initial eligibility to paticipate in the agreement." One may argue otherwise, but it is very likely that eligibility for any elective deferral under the plan is initial eligiblity "in the agreement" because elective deferrals are done through salary reduction agreements and that is what a one-time election is. Since employees become eligible for elective deferrals right away, a one time election has to be done right away, not years later. If the superintendent contract has the deferral (or whateve they want to call it) from the outset, it is probably OK because it meets the "initial eligibility" requirement. Renegotiation of a contract to provide for the deferral for the first time is dangerous.

The IRS would not issue a letter ruling on the proposition that current employees could participate in one-time elections when a new 403(B) plan was adopted. The employer had a deferral-only 403(B) plan. The new 403(B) plan had no elective deferral feature, but allowed a one-time election for everyone in addition to employer funded contributions. The eligibility for the deferral-only plan killed the opportunity for the current employees. New employees were OK if they elected right away. Ruling positions and enforcement positions of the IRS can be different. Better to be advised by a "prominent ERISA attorney" than an internet message board.

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Guest STLGiant

Agreed that this is getting close to the unauthorized practice...but based on what I've heard in ASPA circles, the contract dictates future employment. If the contract expires, as it typically does, the employee is new all over again. At least that's the way many Esq's have explained it to me. Since Carol is an attorney, maybe she will provide a comment...

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Nondiscrimination requirements do not apply to employer contributions to a 403(B) plan maintained by a government. The only rules which apply are the 200k limit on comp and the 40k limit on employer contributions. Employee can put away 15k in sal reduction ( 11k under 402(g), 1k over 50 catch up and 3k g3 catch up if ee has 15 years of service). Employer contribution is difference between 40k and employee contribution or maximum of 29k. There is a difference between a one time election and renegotiation of an employment contract. CEOS and professional athletes renegotiate contracts to take advantage of changes in the tax laws all the time. It is without merit to state that a CEO of a np cannot renegotiate his employment contract to take advantage of a change in the tax law which did not exist at the time the previous contract was agreed on. The way to do it is to have the board offer the make a contribution to the CEO's 403(B) contract equal to the difference between the 415 limit (40K and the maximum that can be contributed by salary reduction to the the 403(B) plan because the employee will not be given the opportunity to make an election. Otherwise an employer could never increase the amount of the employer contribution for an employee after initial eligibility.

mjb

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"Without merit" is a bit extreme, even for a lively discussion of the issue. I think the circumstances of the negotiations, the compensation package and the outcome from year to year is important. There is an issue and need for advice from someone who understands the issue. Certain approaches are not possible and how you document the arrangements can make a big difference.

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