Pairing non-ERISA 403(b) with 401(a)

[Guest RMassa]

I have stumbled on a potential client with a 403(B) plan and a 401(a) plan. The client claims that they only make employer matching contributions to the 401(a)plan based on employee contributions made to the 403(B)(of course I cannot get a copy of the 401(a) plan document). If you don't contribute to the 403(B) plan, you are not eligible to receive contributions to the 401(a). This arrangement allows the employer to maintain the 403(b)without complying with ERISA, avoid the ADP testing inherent in 401(k)and minimize administrative hassles by contributing matches as infrequently as annually.

However, I don't understand legally how you can base matching contributions to the 401(a) on employee deferral contributions made to a 403(B) plan. Can anyone think of a type of 401(a) plan and the provions required within it that would permit such an employer contribution formula without losing its qualified status???

Thanks

[Guest CVCalhoun]

You might look at the definition of matching contributions under Code section 401(m). As I recall, this permits contributions to a 401(a) plan to be treated as matching contributions, even if they match employee or salary reduction contributions to another plan (e.g., a 403(B) plan or a 457 plan). Of course, you'd still have to run the numbers to make sure the 401(m) tests were met.

As to the type of 401(a) plan to be used for the match, it would typically be a profit-sharing plan. Note that the Code now specifically permits nonprofit organizations to have profit-sharing plans.

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Employee benefits legal resource site

[Note: This message has been edited by CVCalhoun]

[MWeddell]

Not only is this legal, but it's a sensible plan design in some situations. It also improves the 415© situation because the 401(a) and 403(B) plans are subject to separate 415© limits.

Another advantage is that the 401(a) plan can cover all employees, regardless of whether they contribute to a 403(B) contract or whether they contribute to a 401(k) plan for the for-profit affiliates.

Even though the match isn't made to the 403(B) program, one ought to treat the 403(B) program as subject to ERISA now in my opinion.

[Guest RMassa]

Mr Weddell:

So you feel that the 403(B) & 401(m)plans must now be aggregated as one plan, thus the 403(B) is subject to ERISA?

Thanks

[QDROphile]

The 403(B) plan is subject to ERISA and the plans are not aggregated for section 415 purposes unless some very specific exceptions apply. The 401(a) plan is considered in the calculation of the exclusion allowance under the 403(B) plan.

[Ellie Lowder]

Pairing a 401(a) plan with 403(B) deferrals is a popular design. However, if employer contributions are matched to 403(B) deferrals, then the 403(B) piece is also part of the ERISA plan. Many employer make 401(a) employer contributions (money purchase is popular with well funded 501©(3)s), then permit employees to make elective deferrals to the 403(B) paln which "sits" outside the ERISA plan. Unless catch up Option C is used, there are two separate 415© limits, permitting highly paid employees to make "sizeable" deferrals.

[MWeddell]

Sorry I'm a little slow to respond, RMassa, to your question.

The 403(B) is not aggregated with the qualified plan that holds the matching contributions. The whole idea of aggregation is not in ERISA. Instead, aggregation is a discrimination testing concept in the Internal Revenue Code and does not apply here. Aggregation for the limited purpose of 415 is covered in the prior posts.

The 403(B) plan is subject to ERISA because by using the data to compute matching contributions, the employer is acting outside of the very limited role set forth in Labor Reg. 2510.3-2(f). The employer is acting more like a plan sponsor, not just a conduit for the annuity issuers. In addition, one could argue that the match makes the 403(B) participation no longer "completely voluntary" as stated in that regulation. It's not 100% clear, but I'd definitely urge my client to err on the side of treating the 403(B) as subject to ERISA even where the match goes into the qualified plan.

[Guest Christine]

This topic is a very timely one. We have the same situation but were advised that the 403(B) plan is NOT subject to Title I of ERISA since the DOL provides an exemption for government plans--plans of federal and state governments, their political subdivisions, agencies and instrumentalities. There is also an exemption from Title I for plans maintained by a church or association of churches.

[Guest CVCalhoun]

You're right, Christine. This would be a concern only for 501©(3) organizations which were not considered church or governmental employers under ERISA.

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Employee benefits legal resource site

[Guest Jose Rosario]

What are the issues to be considered if a government agency

that sponsors a 403(B) plan and matching 401(a) plan is restructured as a 501©(3) organization? The major issue seems to be the triggering of ERISA coverage for the 403(B) plan, if in fact ERISA did not apply before the restructuring. Also, it appears that both plans will become subject to 5500 disclosure requirements under ERISA, and both underlying trusts will be subject to income taxation if subsequently disqualified. Any other issues to consider from either the 403(B) or 401(a) perspectives?

[Guest RJT]

The government agency obtaining 501©(3) status (such as several county hospitals have done) does not necessarily change the nature of the organization as a governmental organization. Depending on the specific facts of the reorganization, it may still well be a government org.

If so, ERISA will still not apply to any plan that the gov't 501©(3)org sponsors-and the combo plan creating an ERISA 403(B) plan becomes a non-issue. As does, by the way, the non-discrim testing and coverage testing rules. What you are left with is properly claculating the limits.

Now if you could just figure out who the "employer" is for MEA pupoese and universal eligibility when you have a gov't 403(B)....

[Guest Jose Rosario]

Thanks for your input, RJT. ERISA Opinion letter 99-02A seems to support your position. As for your closing comment:

The client referenced in my initial posting was indeed a county hospital; thus, as a master of oversimplification, my first impression is that the hospital would be the employer for both the max exclusion and eligibility. Am I overlooking something?

[Guest RJT]

You're generally right. The challenge only comes in on the edges and in a few of the details- such as in use of the 415©(4)© election to compute the MEA, where you must use the 401(a) aggregation rules for controlled group employer to compute the MEA limit. Universal eligibility for a county owned 501©(3), however, is probably a cinch because there are unlikely to be any other county controlled 501©(3) operations to muck with.