5305 and 403(b)

[Guest Inhouse ERISA]

Does anyone know if maintaining a 403(b) plan makes the employer ineligible to use the Form 5305 for a SEP? In other words, does the Service consider a 403(b) plan to be a "qualified retirement plan" for purposes of using a Form 5305?

Thanks

[Gary Lesser]

This is a good question for requesting a "General Information Letter" from the IRS.

The reason for not allowing Form 5305 to be used with a currently maintained qualified plan involves IRC Section 415 annual addition limits. The SEP and 403(b) plan may share the same 415 limit (on employer and/or employee level); so it may be unwise to use the model form.

Although a 403(b) is not a qualified plan under Code Section 401, the term frequently includes 403(b) plans for other purposes; and as you are aware, the model form does not define the term

Hope this helps.

[Guest StephenJ7976]

1. I submitted this question to the IRS and received a response from an agent a few months ago indicating that a tax-exempt organization that sponsors a 403(b) arrangement is not permitted to use Form 5305-SEP to satisfy the written instrument requirement with respect to the SEP.

2. With regard to the Section 415 impact of contributions made to a 403(b) arrangement and contributions to a SEP sponsored by the same employer, to the extent that an employee is not considered to “control” the employer (within the meaning of Treas. Reg. § 1.415(f)-1(f)(2)), it is my understanding that the 415 limitations do not require aggregation of the 403(b) contributions with the contributions made on the employee's behalf to the SEP.

Specifically, the Section 415 regulations require that “[a]ll defined contribution plans . . . ever maintained by the employer . . . under which the participant receives annual additions are treated as one defined contribution plan.” Treas. Reg. § 1.415(f)-1(a)(2). However, under Treas. Reg. § 1.415(f)-1(f)(1):

“the participant on whose behalf the annuity contract is purchased is considered for purposes of section 415 to have exclusive control of the annuity contract. Accordingly, except as provided in paragraph (f)(2) of this section [i.e., where a participant in the 403(b) arrangement is in control of another employer and that employer makes retirement contributions on the employee's behalf to a defined contribution plan maintained by that employer], the participant, and not the participant’s employer who purchased the section 403(b) annuity contract, is deemed to maintain the annuity contract, and such a section 403(b) annuity contract is not aggregated with a qualified plan that is maintained by the participant’s employer.” (emphasis added)

While this regulation specifically refers to a “qualified plan” maintained by the participant’s employer (which would technically not include a 403(b) arrangement), if the participant is the one considered to “maintain” the 403(b) annuity contract (and/or custodial account) and the employer is the one that “maintains” the SEP, under the general rule of aggregation in Section 415 quoted above, contributions to these two plans on behalf of a single participant during a single year are not required to be aggregated.