Anti-Conditioning Question

[Guest cphcs]

The final 403(b) regulations contain the following anti-conditioning rule:

"An effective opportunity is not considered to exist if there are any other rights or benefits (other than rights or benefits listed in §1.401(k)-1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or indirectly) upon a participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract." Treasury Regulation § 1.403(b)-5(b)(2) (in relevant part).

This rule is of course similar to the following anti-conditioning rule, applicable to 401(k) plans:

"(i) General rule. A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee's electing to make or not to make elective contributions under the arrangement…." Treas. Reg. § 1.401(k)-1(e)(6)(i) (in relevant part).

However, the 403(b) regulation does not include the following exception, which is contained in the 401(k) regulation:

"(iii) Effect of certain statutory limits. Any benefit under an excess benefit plan described in section 3(36) of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93- 406, that is dependent on the employee's electing to make or not to make elective contributions is not treated as contingent. Deferred compensation under a nonqualified plan of deferred compensation that is dependent on an employee's having made the maximum elective deferrals under section 402(g) or the maximum elective contributions permitted under the terms of the plan also is not treated as contingent." Treas. Reg. § 1.401(k)-1(e)(6)(iii).

I welcome feedback/thoughts on the following questions:

1. Should Treas. Reg. § 1.403(b)-5(b)(2) be interpreted to incorporate the exception contained at Treas. Reg. § 1.401(k)-1(e)(6)(iii)?

2. If the answer to question 1 is yes, should the reference to Code § 402(g) in Treas. Reg. § 1.401(k)-1(e)(6)(iii) be read to require that, to use this exception, a participant age 50 or older must not only exhaust the 402(g)(1)(B) limit ($16,500 for 2009), but must also exhaust the catch-up contribution limit referenced at Code § 402(g)(1)©?

Thanks

[J Simmons]

The final 403(b) regulations contain the following anti-conditioning rule:

"An effective opportunity is not considered to exist if there are any other rights or benefits (other than rights or benefits listed in §1.401(k)-1(e)(6)(i)(A), (B), or (D)) that are conditioned (directly or indirectly) upon a participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract." Treasury Regulation § 1.403(b)-5(b)(2) (in relevant part).

This rule is of course similar to the following anti-conditioning rule, applicable to 401(k) plans:

"(i) General rule. A cash or deferred arrangement satisfies this paragraph (e) only if no other benefit is conditioned (directly or indirectly) upon the employee's electing to make or not to make elective contributions under the arrangement…." Treas. Reg. § 1.401(k)-1(e)(6)(i) (in relevant part).

However, the 403(b) regulation does not include the following exception, which is contained in the 401(k) regulation:

"(iii) Effect of certain statutory limits. Any benefit under an excess benefit plan described in section 3(36) of the Employee Retirement Income Security Act of 1974 (88 Stat. 829), Public Law 93- 406, that is dependent on the employee's electing to make or not to make elective contributions is not treated as contingent. Deferred compensation under a nonqualified plan of deferred compensation that is dependent on an employee's having made the maximum elective deferrals under section 402(g) or the maximum elective contributions permitted under the terms of the plan also is not treated as contingent." Treas. Reg. § 1.401(k)-1(e)(6)(iii).

I welcome feedback/thoughts on the following questions:

1. Should Treas. Reg. § 1.403(b)-5(b)(2) be interpreted to incorporate the exception contained at Treas. Reg. § 1.401(k)-1(e)(6)(iii)?

I don't think so. Obviously the drafters of Treas. Reg. § 1.403(b)-5(b)(2) were cognizant of the similar anti-conditioning rule of Treas. Reg. § 1.401(k)-1(e)(6) when drafting. Otherwise, there would have been no mention of any part of Treas. Reg. § 1.401(k)-1(e)(6). Given that there is mention of portions of Treas. Reg. § 1.401(k)-1(e)(6), but not the Treas. Reg. § 1.401(k)-1(e)(6)(iii) exception should suggest that the drafters of Treas. Reg. § 1.403(b)-5(b)(2) did not want the Treas. Reg. § 1.401(k)-1(e)(6)(iii) exception to apply in the 403b context as it does in the 401k context.

2. If the answer to question 1 is yes, should the reference to Code § 402(g) in Treas. Reg. § 1.401(k)-1(e)(6)(iii) be read to require that, to use this exception, a participant age 50 or older must not only exhaust the 402(g)(1)(B) limit ($16,500 for 2009), but must also exhaust the catch-up contribution limit referenced at Code § 402(g)(1)©?

If the answer to question 1 is yes, then I think that calls for an interpretation of the nonqualified deferred compensation plan's language.