403(b)

[Guest dob]

A 501©(3) organization maintains a 403(B) plan which allows all employees to make deferrals commencing at any time after date of hire (to comply with the availability requirements in 403(B)(12)(A)(ii)). The plan also allows eligible employees (i.e., those working more than 1000 hours per year) to make a one-time irrevocable election to defer 2% of compensation after 6 months of employment. An eligible employee who makes the election will receive an integrated employer contribution. Both the initial employee contribuion (available to all employees) and the 2% contribution are made pursuant to the same 403(B) document but are made to different funding contracts. Are there any thoughts on whether the employer can take the position that the 2% contribution is not a salary reduction contribution under 403(B)(12) and is not an elective deferral under 1.402(g)-1©, even though employees are allowed to make employee contributions immidiately upon hire and do not make their 2% irrevocable elections until satisfying the 6 month eligiblity requirement? (If the 2% contributions are elective deferals, they would be subject to the 402(g) limit, various inservice distribution restrictions, and the employer's integrated contribution would also appear to be a matching contribution.)

[Guest Yanikoski]

I don't think you have a problem here. By the letter of the law, there is no stipulation I am aware of that the one-time election has to be made at the time of hire, or that it has to go into effect immediately. By the spirit of the law, you are also in conformity. The purpose is to prevent arrangements in which contributions are really elective but are disguised to look like non-elective contributions -- the IRS will look at the facts and circumstances to make this determination. In the situation you propose, it appears that the one-time election is a valid restriction, and that all contributions pursuant to that election are non-elective. I can't think of any reasonable argument that would characterize such contributions as elective deferrals. Still, I am not aware of any direct IRS guidance on such a case. Perhaps someone else is.

[QDROphile]

There is a requirement that one-time elections be made "at the time of initial eligiblity to participate in the agreement." IRC 402(g)(3). The IRS has refused to rule that a one-time election that is made after a participant is eligible for "regular" deferral elections is a separate "agreement." You are on thin ice (or perhaps all wet) if the one time election can be made later than the first salary reduction election is available.