Question about defining "compensation"

[mariemonroe]

I am new to the 403(b) area so pardon my ignorance.

I have a client (a school) with a 403(b) plan that has been around since the 60s.

They do not have a plan document and have asked me to help them in putting one together.

They have given me their pertinent plan provisions and several written descriptions of the plan to assist me.

Basically, the plan requires participants to defer 5% of their compensation (that is, participation is not required, but if you choose to participate, you must defer 5%). The employer then contributes 5% of your compensation for a total annual contribution of 10% of compensation.

They have asked me to make sure their definition of compensation includes only contract salary (as opposed to W-2 wages). For example: a teacher has a contract to teach for one year for $30,000. If that teacher also coaches a sport for $1,500, that $1,500 is NOT considered compensation for purposes of the 403(b) plan.

In the qualified plan context I am always very cautious when it comes to modifying definitions of compensation but I am unsure whether this seemingly innocent request should raise any red flags when it comes to the 403(b) plan context.

I appreciate any guidance.

[QDROphile]

My suggestion is that if you are not experienced with secton 403(b) and government plans, you should not undertake any responsibility for plan documentation, especially in light of the new regulations that place an emphasis on plan documentation.

I hesitate to send you rope with which you will hang yourself, but you may wish to look at the IRS model 403(b) plan document. It does not address the specific issues that you mention (the contract compensation is addressed indirectly, depending on circumstances), which suggests that some special knowledge is required to perform adequately.

[John Feldt ERPA CPC QPA]

Just a note regarding the 5% deferral: Unless this is a church plan, the universal availability requirement allows a minimum of $200 for deferrals, meaning you can reject an annual deferral that would not hit the $200 mark. Thus, I am thinking that a 5% minimum possibly violates the universal availability requirement. FWIW.

[mariemonroe]

Just a note regarding the 5% deferral: Unless this is a church plan, the universal availability requirement allows a minimum of $200 for deferrals, meaning you can reject an annual deferral that would not hit the $200 mark. Thus, I am thinking that a 5% minimum possibly violates the universal availability requirement. FWIW.

I thought mandatory employee contributions were OK?

See http://benefitslink.com/boards/index.php?s...mp;hl=mandatory

[John Feldt ERPA CPC QPA]

(that is, participation is not required, but if you choose to participate, you must defer 5%).

I thought mandatory was a condition of employment, where the employee cannot choose whether or not to participate.

[mariemonroe]

(that is, participation is not required, but if you choose to participate, you must defer 5%).

I thought mandatory was a condition of employment, where the employee cannot choose whether or not to participate.

I see the distinction now.

Actually, as the plan is currently operated, mandatory contributions to the plan ARE a condition of employment.

However, the employer would like to eliminate this provision and make employee contributions optional.

So it sounds like if they go this route, they cannot require employees who chose to participate to contribute 5%. Correct?

[John Feldt ERPA CPC QPA]

Agreed.

[mariemonroe]

Agreed.

Can I get your thoughts on how to handle this?

As I said, the employer currently requires all employees to participate in the plan and contribute 5%. My understanding is that these are not considered elective contributions (1.402(g)(3)-1(b)).

However, the employer has recently hired some employees who do not want to participate in the plan. These are retired public school employees who have already saved for retirement .

The employer wants to retain these employees (the retired former public school employees).

However, based on our earlier exchanges, it sounds like if the employer decides to no longer mandate participation in the plan as a condition of employment, the employer will be forced to comply with the elective deferral rules and thus permit all employees to either opt out of the plan or defer at a different % of compensation.

Can you think of any way to accomplish the goal of letting former public school employees opt out of the plan while forcing the other employees to continue to defer at the 5% level?

[John Feldt ERPA CPC QPA]

If these rehires are only part-timers, then I'm going beyond my expertise when I now suggest that they discuss with their CPA the option of considering such rehires as independent contractors instead of employees, so please don't quote me on that idea. If they are full-time, then they really have to refer to their current employment requirements, one of which states that 5% must be withheld from pay to go into the plan.

They could change the mandatory deferral to voluntary, and just match dollar for dollar on deferrals up to 5% of pay (that might save the employer some money too, if some now choose to defer under 5%). Is there a union contract preventing that option?