Church 403b7 & Employer Contributions

[Guest gregg_gg]

This may be a bit of a technical question, but hopefully someone can direct me to a good resourse. Here's the situation:

I am the administrator at our local church. We have a 403b7 plan through Vanguard. The plan docs are the VG template documents and in general the plan is set up to take only employee contributions because there is no 3rd party administrator no matching language, etc.

The church desires to make a large gift into the Sr. Pastors 403b as a one-time employer contribution ($100,000). [Actually there is husband/wife who are Co-Senior Pastors.] Initially I believed that it was not possible to make employer contrubutions without creating new plan docs. After some research, my understanding is that the Employer contribution in the 403b7 would indeed be allowed provided it meets discrimination testing - which I took to mean that despite not normally being subject to descrimination, it would be because of no plan docs. What we do for one participant we have to do for another (although I'm the only other participant and will be out of the plan for 2006). Since the $ amt is large, there are a couple issues.

First, I need to indeed find some language or documentation that the church can indeed make an Employeer contribution to a 403b7 without unique plan docs. (Per VG, it's okay, but they're not answering to the IRS, we are of course). And if it IS okay, then my understabding is that it must be based on percentage of income - and also must be done for each participant. Is that true or false?

Second, I need to confirm that I can shelter the whole $100,000. My understanding is the the aggregate contribution limit is the lesser of $42,000 ($44,000 for 2006) or 100% of compensation. Since the Pastors combined make about $100,000 my understanding is that we will be able to contribute $42,000 per person this year and/or $44,000 per person next year. Caveat is that about $40,000 of their pay comes as tax-free housing allowance and as far as I can tell (via FAQ on irs.gov) that is EX-cluded from total comp calcs, so their includable comp is about $60,000, which means we could do $60,000 in 2005 and $40,000 in 2006 to get to $100,000 (technically those would be divided up between the pastors - I'm just talking in aggregate numbers.) This is my understanding so far.

Third, since I am technically IN the plan in 2005, do I cause them to fail discrimination testing this year. Or because they are the Founding Sr. Pastors are there exclusions. And does discrimination just cover plan participants, or all hired employees? Etc.

I know it's a lot to ask, so thanks for any direction. (Fwiw, I have tried to work with several accountants, and it's a tough subject to find expertise)

GG

PS - for 2005 there may not be a discrimination issue since we can give them a one time bonus and have them defer it as an employee deferral. The limit on that would be $14,000 each, but they would also get a $3,000 years of service increase, which would be $17,000; times 2 people would be $34,000. Assuming 2006 limit of included income is indeed $60,000 ($30,000 each), then we'd be at $94,000 - which is at least *close*.

[Guest mjb]

A good source of free information on maximum contributions is IRS publication 571 which has worksheets on calculating max contributions including the catch up for over 50 employees. The publication can be downloaded by accessing the IRS web site at www.irs.gov and scrolling down to pub 571 under the retirement benefits icon. You can get free information by checking out the TIAA-CREF website www.TIAACREF.org(?)and looking under maximum 403b contributions.

[GBurns]

Have you asked Vanguard?

[Locust]

I have some prior experience with Vanguard and its 403(b) documents (3 or 4 years ago). At that time their administration for smaller nonprofits was different for plans that had employer contributions because a nonprofit (other than a church) that puts employer money into the plan is an ERISA plan, requiring more employer involvement and a more extensive document. At that time they wouldn't do a document with employer contributions unless it was a significant account. This may have changed.

You've got an unusual situation because the rules, including the nondiscrimination rules, for churches are different, and you probably would do well to get a specialist in 403(b) plans involved. You might want to check to see if you have someone like that in your congregation - an attorney, CPA, or noninterested investment advisor.

[Guest gregg_gg]

I have spent a great deal of time on this issue. Every single CPA or other "expert" I talked to had at least one peice of information that I believed to be incorrect. The problem was that each person had a difference piece of incorrect information. Through it all, I've concluded the following:

1. Even though we are a non-Erisa plan due to being a Church, we are still not able to discriminate with Employer contributions for anyone working more than 1000 hrs. This is okay, since in 05 I was the only other employee to work that many hours and the board is likely to contribute to my plan to keep the plan in compliance.

2. The Employer contribution is limited to 25% of the employee's includible income via 415 limits [although the aggregate limit of employer and employee contribution is limited to the lesser of $42,000 or 100% of income].

>>Includible Income INCLUDES: Employee deferrals, Salary, etc.

>>It EXCLUDES: Housing allowance (big issue here), and Car allowance (not sure about this becase pub 571 talks about including "the value of qualified transportation fringe benefits... transportation in a commuter highway vehicle between your home and work". Except my CPA says no).

So, In the end, we are going to end up doing the following:

2005 Employee Deferrals: $28,000

2005 Employer Contributions: $20,000

2006 Employee Deferrals: $30,000

2006 Employer Contributions: $20,000

We are then going to try and do $3,000 through the years of service catchup provision to get to the $100k mark, but we might have an issue because Paychex wont allow anything over $15,000 as catchup unless your 50yr old, so they obviosuly dont recognize the 15 yr catchup provision.

Alos, VG was a big help, but this is beyond their expertise. They told be some good info, but they're not tax people.

Anyone with info confirming or denying anything I believe to be true, would be VERY valuable.

Thanks Again,

GG

[Guest mjb]

G: Under 403(b)(12) a church that is defined in IRC 3121(w)(3)(A) is exempt from the non discrimination and participation requirements you discussed in 1.

I dont know where you got the info that employer contributions are limited to 25% of comp. That limit only applies to the deduction for contributions which does not apply to a Non profit employer.

As for paychex you are learning the limitations of using a generic payroll provider that is not programmed to take special deferral amounts for 403b plan into account. Vanguard will not provide legal or tax advice to customers-you need to retain experienced counsel for that.