Church Plan "Correction" - Improper Match

[Guest AEA]

I've looked at the last 2-3 years of posts and do not see a similar thread.

A church maintains a 403(B) plan - using retirement income accounts and a bank trustee - for its lay employees, including its school's employees. It is clear that plan meets the "church" definition. The plan provides for deferrals and an employer match of deferrals "provided, however, such matching contribution shall not exceed 3% of the participant's compensation". Because it is a retirement income account plan, the plan document is the only "document" for the plan.

Unbeknownst to the trustee, the pastor of the church negotiates with the school's principal and athletic director for the 2000 and 2001 academic years that they will receive a match of 4% and 5% respectively. (A trustee employee recently noticed that the match check for 2001 seemed too high for a 3% match, but they do not calculate the match amount). Neither employee makes a salary sufficient to be a highly compensated employee.

Since the discrimination rules do not appear to mind if a plan discriminates among NHCEs (and a church isn't subject to 403(B)(12)), the only issue I have left is whether an operational defect occurred and how (or if) to correct it.

My instinct is to say it is an operational defect and should be corrected under SCP because the church clearly did not follow the terms of the plan document. However, I have discovered a number of sources (including the IRS guidelines) that keep repeating that a 403(B) plan need not have a written plan document. (but that the annuity contract or custodial account must have certain provisions) Other sources state that this situation should be corrected (suspense account or 2% fee from Rev Proc 99-13).

My options appear to be:

1) treat the match as an operational defect and place the excess amounts in a suspense account for future matching contributions (amend the plan to allow the increased match "as negotiated" for 2002 forward) under SCP

2) treat the church's employment contracts with the employees as de facto plan amendments and fix the document accordingly and retroactively

3) use the 2% fee I've seen discussed on this board but do not really understand

I would appreciate any opinions or thoughts (especially from anyone who has had this situation arise).

Thank you!

(Sorry for the length, but wanted to lay out the facts well)

[mbozek]

Unlike qualfied plans 403(B) plans are not required to be administered in accorance with their terms. Second a church 403(B) plan is not required to be in writing. Dont need to do anything retroactively because the amounts in the plan are 100% vested and I dont think that you would be in favor with the board if you removed money form the accounts of two senior employees. Option 2 is the best course of action. Only real issue is whether the 415 limits/20% exclusion allowance were exceeded but this is unlikely.