403(b)/457 Defined Benefit Plan?

[Guest dam1869]

A client is stating that they would like to offer a Defined Benefit 403(b) and 457 plan. I have told them that this is not possible since they are mixing two very different plan types together, however, I would look and see if this option is a possibility. Thus far, my internet searches have not come up with anything substantial to state definitively if this "hybrid" plan is allowed. My personal out reach to other retirement professionals has yielded laughter.

Can someone please let me know if this plan type is allowed under the code and what would be a good resource to review the rules? Thanks.

[Everett Moreland]

See the following 1.403(b)-10(f):

(f) Defined benefit plans—(1) Defined benefit plans generally. Except for a TEFRA church defined benefit plan as defined in paragraph (f)(2) of this section, section 403(b) does not apply to any contributions or accrual under a defined benefit plan.

(2) TEFRA church defined benefit plans. See section 251(e)(5) of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97–248, for a provision permitting certain arrangements established by a church-related organization and in effect on September 3, 1982 (a TEFRA church defined benefit plan) to be treated as section 403(b) contract even though it is a defined benefit arrangement. In accordance with section 403(b)(1), for purposes of applying section 415 to a TEFRA church defined benefit plan, the accruals under the plan are limited to the maximum amount permitted under section 415© when expressed as an annual addition, and, for this purpose, the rules at § 1.402(b)–1(a)(2) for determining the present value of an accrual under a nonqualified defined benefit plan also apply for purposes of converting the accrual under a TEFRA church defined benefit plan to an annual addition. See section 415(b) for additional limits applicable to TEFRA church defined benefit plans.

[Don Levit]

In addition, 403(b)(12) Non discrimination requirements

For purposes of (1)(D), a plan meets the nondiscrimination requirements of this paragraph if

(ii) all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement.

For purposes of clause (ii), there may be excluded any employee who is a participant in an eligible deferred compensation plan within the meaning of section 457.

Don Levit

[Guest mjb]

Reg 1.457-2(b)(3) states if the eligible plan is a defined benefit plan within the meaning of IRC 414(j), the annual deferral for a taxable year is the increase in the present value of a participant's benefits that is not subject to a substantial risk of forfeiture. The maximum deferral is $15,500 or $20,500 for a participant in a govt 457 plan who is age 50.

An ineligible plan can be adopted which provides for any db benefit amount as long as the benefits are subject to a substantial risk of forfeiture until the employee retires.

[GBurns]

dam1869

I am unclear as to what you are asking.

Are trying to have a "combo" plan consisting of BOTH rather than 2 separate plans ? You used the term "hybrid".

Are you asking if it is allowed to have both, but as separate plans?

Are you asking if one of the items in the "combo" can be a Defined Benefit 403(b) plan ?

[Lori Friedman]

I'm uncertain about what your client means by a Defined Benefit 403(b) plan. A DBP, which is a qualified plan, and a 403(b) plan are two completely different and separate benefit arrangements.

Could your client be in the market for a 403(b) plan funded by annuity contracts that kind-of-sort-of mimic the characteristics of a DBP?

[Guest mjb]

Long, long ago there were group annuity plans in which the employee made elective contributions under 403b and the employer provided an annuity benefit based upon the employee's years of service and compensation. The employer funded the difference between the employees' contributions and the minimum funding amount need to provide the beneefit. The plans were known as DB 403b plans and are no longer permitted uinder TEFRA.

[TLGeer]

See 1.403(b)-3(b)(3)(i): "A contract does not satisfy paragraph (a) of this section unless it is maintained pursuant to a plan. For this purpose, a plan is a written defined contribution plan..." and 1.403(b)-10(f)(1): "Except for a TEFRA church defined benefit plan as defined in paragraph (f)(2) of this section, section 403(b) does not apply to any contributions or accrual under a defined benefit plan."

457 clearly allows DB plans. 1.457-2(b)(3) states: "If the eligible plan is a defined benefit plan within the meaning of section 414(j), the annual deferral for a taxable year is the present value of the increase during the taxable year of the participant's accrued benefit that is not subject to a substantial risk of forfeiture (disregarding any such increase attributable to prior annual deferrals). For this purpose, present value must be determined using actuarial assumptions and methods that are reasonable (both individually and in the aggregate), as determined by the Commissioner." That is, the limitation applies to the increase in the vested accrued benefit, including amounts previously accrued but becoming vested. The increase in value resulting from the passage of time is not taken into account.

Note that if the 457 is governmental, it must be fully funded as to vested accrued benefits, with none of the normal contribution smoothing allowances for experience losses.