Employer Contributions After Retirement - Just for School Districts?

[Christine Roberts]

The EGTRRA change to Section 403(b)(3) to permit employer contributions for up to 5 years after retirement is not limited to school districts, is it?

I know that the provision was designed with K-12 teachers in mind, but it is equally available to employees of private charitable orgs., is it not?

[RTK]

My reading is that it applies to employees of 501©(3) organizations.

[Guest Yanikoski]

Although post-retirement contributions are permissible for any kind of organization, there can be practical difficulties for certain kinds of employers.

The contributions have to be EMPLOYER contributions, since employee contributions can be made only by salary deferral, and there can be no salary deferral if there is no salary.

Employer contributions make the plan subject to ERISA non-discrimination testing, however. This is not a problem for public school districts, and for other governmental 403(b) sponsors (such as state colleges/universities and government-owned hospitals), or for most churches, since they are effectively exempt from nondiscrimination testing.

But for a typical 501©(3) organization, a private college, and most hospitals that sponsor 403(b) plans, the employer might have to agree to make contributions to all eligible retired employees in order to make such constributions to any of them. This could be a high price to pay.

[Christine Roberts]

Chuck, thanks for the very helpful gloss on this topic.

Is it safe to say that, if a 501©(3) organization has only one prospective retiree, it can provide the post-retirement payments without concern for nondiscrimination rules, so long as that person remains the sole retiree?

Then, if another person retired after, say, three years of payments to the original retiree, the organization could either (a) discontinue post-retirement payments to the original retiree or (b) continue post-retirement payments to the original retiree and make contributions to the new retiree as well.

[Guest Yanikoski]

I wouldn't want to try to say for sure, but I am not aware of any clear rule that this would violate (perhaps someone else on this site will have some additional insight for you).

If the plan is not already subject to ERISA, you will be making it subject to ERISA by adding the post-retirement employer contributions, with the extra nuisance and expense that this entails. You will also need a written plan document if you don't already have one. The document would have to be written to include the post-retirement contributions, then later amended to remove them from the plan.