OK to set up profit sharing plan for non-profit emlpoyer's discretiona

[FJR]

I have a new non-profit client who has a typical arrangement with a custodian. The employee establishes a contract to defer their salary pre-tax. No plan document with the employer.

The employer wants to contribute a discretionary amount of money each year. Can they establish a Profit Sharing trust in order to accomplish this? They are a 501©3 Org. I would appreciate any suggestions.

Thanks

[Everett Moreland]

Yes, the employer can establish a profit sharing plan and trust for the employer discretionary contributions.

[mbozek]

The employer can establish a separate 403(B) plan for discretionary employer contributions instead of a qualfied plan. The 403(B) plan would be subject to ERISA but would not need to get a determination letter from the IRS or file a detailed 5500 each year. The benefit could be paid in a lump sum without spousal consent. Unless the employer will contribute more than $28,000 to the discretionary contribution plan (14% of comp) there is no reason to have a separate qualfied plan.

[jpod]

Insofar as the joint and survivor annuity rules are concerned, I'm not sure that you could ever have an employer-funded 403(B) that is exempt from those rules. To be exempt, it can't be a "money purchase pension plan." To my knowledge, there is no definition of "money purchase pension plan" that applies for purposes of Title I of ERISA, and I don't think this has been the subject of any reported court decisions.

Most 403(B) custodians and annuity issuers play it safe and assume that all ERISA-covered 403(B)s are subject to the joint and survivor annuity requirements.

[mbozek]

A 403(B) plan funded with custodial accounts can provide for discretionary employer contributions the same as a PS plan without a J & S annuity benefit. There are 403(B) plans out there that are treated as ps plans. The IRS recognized long ago that a np employer can maintain a ps plan in which the employer made discretionary contributions.

[jpod]

You are assuming that if employer contributions are discretionary, then the plan is not a money purchase pension plan for purposes of Title I of ERISA. You may be right, but I don't think there is any authority for that proposition.

[mbozek]

There is no authority for requiring 403(B) annuity plans to make fixed contributions either. The 403(B) audit guidelines make no mention of a J & S annuity as a requirement for a 403(B) plan nor is there any mention of a requirement that a 403(B) plan be a money purchase type plan. Reg 1.401-1(B) (1)(i) states that contributions to a money purchase pension plan are fixed without being geared to profits.

[jpod]

You have not cited any authorities under Title I.

Please tell me why you think an employer should be interested in accepting any risk in this regard.

The employer can avoid this risk by either (a) assuming the discretionary 403(B) is subject to the j&s requirements, or (B) set up a 401(a) profit sharing plan.

We're not defending litigation on this board; we're trying to provide helpful suggestions.

[mbozek]

I dont understand your question. There is no requirement under Title I that a 403(B) plan be a money purchase plan. The only requirement is that a MP plan is subject to the funding standards and must provide a J & S annuity. A 403(B) plan with discertionary employer contributions is not a mp plan because there is no fixed contributions. The same rules apply as to a qualified ps plan without the need to set up a trust, qualfiy the plan and file 5500s. By the way a 403(B) plan can also be adopted as a DB plan.

[FJR]

So what you are saying is, you can have a employer only 403(B) document for the NP to fund the employees on a discretionary basis. In your experience, what type of document do you use? A prototype? Can I go to Corbel and get such a document? Cost is the essence with this client. Thanks..

[mbozek]

I dont know if corbel has a prototype plan with the features I have described. Have you tried the custodian? Your problem is that no prototype will contain all of the features that you want or need in the plan. I have drafted PS type 403(B) documents for clients including the SPDs. The document is not a qualified plan and is not submitted to the IRS so it is not that difficult to modify an existing document. There are many provisions that can be included to reduce employer liability in a 403(B) plan that are absent from prototype documents.