Control Group

[Madison71]

A not for profit organization offers a 403(b) plan and a for profit organization does not sponsor a plan, but is is 80% or more controlled by the trustees or directors of the other organization. It seems clear to me from the final 403(b) regs. that you have a controlled group. First, am I reading correctly that the IRS wants an analysis to be done to see whether a not-for-profit and for profit are in the same control group? If so and they are in fact in the same control group, how do you test and what do you do if they fail? I would think universal availability wouldn't apply to a for profit organization b/c they cannot offer a 403(b) plan. Do you have to then offer a 401(k) plan to the for profits? That can't be what the IRS meant.

Thank you!

[TLGeer]

This response assumes we are only discussing elective deferrals. For employer money, the rules are very different.

As to elective deferrals, the only nondiscrimination testing rule under 403(b) is the universal availability rule. Actual use is not tested, unlike 401(k).

The elective deferral rule generally applies on an entity-by-entity basis, so that the controlled group rules are not relevant. State entities with a common payroll are aggregated and there is elective disaggregation for separately operated, geographically distinct divisions that historically have been treated separately for benefits purposes. In addition, church employers, in the 403(b) sense, are not subject to universal availability.

So, assuming no unusual facts, the arrangement is fine whether or not the for profit has a plan.

A source of your question may be the plan-type coordination rules. In applying universal availability, the nonprofit generally can exclude anyone eligible to make elective deferrals under another 401(k), 403(b) or governmental 457(b) plan. This conceptual thread can lead to confusion in thinking about other issues.

[Madison71]

Thank you. Sorry I didn't mention it, but I believe the tax exempt makes employer contributions under the 403(b). It seemed to me from the reading I did that because there is common control between the tax-exempt and for profit that you need to include as one for control group purposes. I also read that if the tax-exempt offers a 403(b) and the for profit offers a 401(k) and specifically excludes the members of the tax-exempt that you are ok.

What about a tax-exempt with a 403(b) that has employer contributions and a for profit under common control that does not offer a 401(k) and does not want to. Any issues here? If so, how would you correct this? I could see offering a 401(k) to your for profits on a go-forward basis, but how are you going to correct retroactively if you even need to do so.

I appreciate your time!

[TLGeer]

As to employer contributions, you will have full nondiscrimination testing. Step one is to determine whether or not the coverage as to employer contributions is nondiscriminatory. That would be the normal safe harbor, etc., analysis under the 410 regulations. If so, the next real-world question is whether or not the demographics are stable enough that you should rely on that analysis in planning.

If you have a failure or future uncertainty, you can (a) put in a qualified plan at the for profit, or (b) consider a 457 for the nonprofit. The 457 could either replace the 403(b) or be used to remove the HCE group from the 403(b) so that it passes. Which would be preferable depends on demographics, employer design goals and costs.

In addition, not that the interaction of the ERISA eligibility rules on minimum service requirements and the way the part-time exclusion under 403(b) interact reduces the utility of the part time exception to universal availability. In effect, it will have to be modified to hideous complexity or only be applied in the first year of employment.

Best of luck.

Tom Geer

[Madison71]

Thanks Tom.

[Madison71]

One last thing.....you indicated the way you could correct a failure going forward. But, what about if in 2009 the tax-exempt contributed X amount to the 403(b) and the for-profit has nothing in place. I see the options going forward, but how do you correct the past? Participants in the 403(b) tax-exempt received employer contributions that the participants of the for-profit did not.

[TLGeer]

Demographics are all. Before you look at cures, you have to make sure there's actually a coverage problem.

[30Rock]

I am not clear on how you satisfy universal availability? Assuming the For Profit has full time employees that cannot be excluded under the 20 hour a week/1000 hour per year rule, and do not meet the other exclusions, how do you satisfy UA if the For Profit does not have a 401k plan?

[TLGeer]

You don't have to. As long as the nonprofit meets universal availability, you're fine.