FREEZE OF 403(b) PLAN

[Guest JONB]

Tax Exempt employer established a 403(B) plan. It has now implemented a 401(k) plan for all employees, and wants to limit the 403(B) plan to only those employees who were employed on 1/1/99. Can the employer do this? The statutory language of 403(B) suggests that all employees (with limited exceptions) be offered the right to participate. Is anyone aware of any authority (statements by Labor-PLRs, etc.) which would permit an employer to limit the 403(B) plan in such a manner? By way of information, the 403(B) plan had a match, and is subject to ERISA, but as of 1/1/99, the match is now being made to the 401(k) plan.

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jpb

[david shipp]

Notice 89-23 provides that, while all employees must generally be given the opportunity to defer under a TSA, certain otherwise eligible employees may be treated as excludable in determining if this requirement is met (N89-23,III). In your case, the applicable category of excludable employees is those who are eligible to participate in a 401(k) plan (N89-23,V.B.3.d). As a result, you could exclude those eligible for the 401(k) plan from participating in the TSA. However, if any employee who is excludable is allowed to participate in the TSA, all employees in that category must be allowed to participate.

It sounds like your plan design wouldn't jibe with that requirement. By putting the match in the 401(k), I am assuming that you want everyone to be eligible for the 401(k), and that those who were employed on 1/1/99 would also be eligible to make TSA deferrals. If this is the case, all employees would have to be eligible for TSA deferrals.

Given this operation, I'm not sure it would be beneficial to grandfather TSA deferral capability.

One possiblity might be to exclude the HCE group from participating in the 401(k) plan and keep them in the TSA program. You would also need to put a match back in the TSA. In this manner, your HCEs would be contributing under the TSA plan and there would be no ADP test. The match would still have to meet coverage and the ACP test, however, and that might require aggregation with the 401(k) for that purpose. (This is just off the top of my head and you will have to do some analysis of N89-23 to see if it holds up on review.)

[Guest CVCalhoun]

It is not clear to me that you can exclude employees from a salary reduction TSA, even if you also exclude all highly compensated employees. Unlike other nondiscrimination provisions in the Code, the provision requiring that all employees be permitted to contribute to salary reduction TSAs does not permit an exception upon a showing that the effect of the provision favors nonhighly compensated employees.

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Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 01-15-99).]

[david shipp]

Carol, although I have not seen any discussion of the issue, I have intepreted Notice 89-23 to allow the exclusion of employees from TSA salary deferral eligibility if they are covered by an eligible 457 plan or a 401(k) plan.

Part III of N89-23 states "Individuals who are excludable employees (see Part V for definition of excludable employees) may be excluded in determining whether a 403(B) annuity plan satisfies this safe harbor." (the 403(B)(12)(ii) "cover everybody" safe harbor)

In Part V, specifically B.3.d, the definition for excludable employee in the case of the 403(B)(12)(ii)safe harbor includes employees who are participants in an eligible 457 plan and employees who are eligible to participate in a qualified CODA.

Please take a look and let me know your opinion.

[Guest CVCalhoun]

Sorry, I was actually responding to a different portion of the message. I believe that you can exclude employees covered by a 401(k) plan, so long as you exclude all of them. The issue I was responding to was whether, if you excluded some but not all employees covered by the 401(k) plan from the 403(B), you could avoid any problems by also excluding highly compensated employees from the 403(B).

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Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 01-15-99).]