Compliance Issues in 403(b)

[Guest Karenm]

Message_Board_Question.doc

[TLGeer]

Message_Board_Question.doc

It's hard to tell from your summary what exactly is going on. I have a couple of preliminary thoughts, but then some questions.

1-It has always been true that 403(b) required a written document, but the market has been so fragmented that no one would take responsibility for the task. All the new regs did was emphasize the point and make it clear that where multiple contracts existed, things like annual limitations had to be coordinated somehow, and that the coordination rules had to be in writing.

2-403(b), properly understood, and since EGTRRA, has been essentially a more generous, and slightly screwy, 401(k). Before EGTRRA, the nature of the annual exclusion calculations was so complex, even without elections, that it was an employee-by-employee, year-by-year calculation. And not for the faint of heart.

3-If the 403(b) document is going to take into account that there must be a single overarching document, and the plan is not somehow exempt from ERISA, you have to have the ERISA rules. A good 401(k) plan is probably the place to start, rather than an MPPP document, because it will contain appropriate language for salary reduction contributions and you can simply pull the ADP test language out. However, it takes time and multiple drafts and reviews to get the language properly converted over. I am in the middle of marking up my old ERISA, non-ERISA and "open market" 403(b) documents, and it's not easy. Two and a half months, and I'm still not happy.

4-The fact that the plan references money purchase does not make it a 401(a), or for that matter a 403(b). You have to look at the language in detail to determine whether it is a good version of either one. The point, though, is that it is the substantive terms that determine "good" or "bad" status, not stray language about money purchase plans.

5-If the drafter didn't know about the existence of different exclusions from universal availability, you have a problem. However, there may be some language limiting to 21/1 restriction to employer contributions, and the plan certainly can do that.

Now the questions:

a-A match on a 0% contribution is not a match. It is an employer contribution, subject to testing as such, not to the ADP test (if it applies at all). Is that what the plan actually says?

b-I don't understand the "second" match tier either. Could you provide the actual plan language? For both?

c-Could the plan be church or governmental? Let's start with the question whether the employer is church-related or governmental or quasi-governmental. the regular controlled group rules dn't apply in making this determination, so think aggressively.

There's a long way to go before going into a corrections program, if that is even appropriate. That is going to include asking the drafter of the plan what happened, which may very quickly turn adversarial. At the very least, when you advise the client you have to (1) give the drafter a chance to show you what you may have missed in the document (I always worry about looking silly when I review somebody else's documents), and (2) figure out whether the drafter, the drafter's malpractice insurer or the client is going to pay the freight. This would be a good time to find a "hold harmless" commitment from somebody.

The fact pattern is, frankly, too complex for a forum of this sort, and at the very least somebody who does mostly or entirely 403(b) is going to have to read the whole thing. However, if you answer the above questions, I can give you the outlines of the issues. In the alternative, you can contact me off-line for a private assessment of the scope and nastiness of the problems. I suggest this because the information may be enough to let someone ferret out your client's identity.

Tom Geer