ERISA Plans Doomed to Fail Universal Availability?

[austin3515]

This is sort of a continuation of a previous thread, but a different question...

OK, so ERISA Plans say that anyone who works 1,000 hours in 12 months must be eligible for the Plan, even if they subsequently drop below 20 hours. The question is (assumign the plan is using the 20 hours exclusion), will allowing this ERISA eligible employee (who now only works 10 hours a week) automatically violate the 1.403(b)-5(b)(4) "all or none" rule? Maybe THAT's why the TIAA document doesn't include the 20 hour a week exclusion?

[Kevin C]

Yes, when ERISA forces you to allow deferrals from someone who could be excluded under the <20 hour per week exclusion, you violate the all or none rule, so you can't use the <20 hour exclusion.

If your clients are like ours, you are likely to find out this happened well after the fact. Then, they get to retroactively correct the improper exclusion of everyone else who used to be excluded for <20 hours per week.

[austin3515]

This ERISA/403b Reg conflict aside, I just got off of a very lengthy phone call with a "BIG" name industry person (often gives seminars, etc) who is adament that a) if you're document states that people with less than 20 hours a week are exlcuded, and b) you let one out of 30 such people into the Plan, the correction is that you refund the one person - you don't make a contribution for the others (assuming the one person did not meet ERISA eligiblity).

He's siting EPCRS, inclusion of ineligible employees which addresses this issue and references 403b plans eligiblity for the correction methods indicated. I didn't see it with my own two eyes, but he is convinced the IRS is completely way off on this.

[austin3515]

I just wrote this explanation for myself because it helps me to understand things by writing about them. What does evreyone think about my conclusions?

I wanted to write this from TIAA's perspective. 1.403(b)-5(b)(4) states (more or less) if any one or more people that work less than 20 hours a week are allowed to defer than NO ONE can be subject to this exclusion (by reference to some 410b section). Therefore, ERISA covered plans could be interpreted to be ineligible for this exclusion across the board because any employee who meets ERISA eligibility is allowed to defer, even if they work less than 20 hours a week. Therefore, because there is a group of employees who ARE eligible to defer in spite of working less than 20 hours a week (i.e., someone who goes from full-time to part time), then EVERYONE in that group must be allowed to defer (i.e., anyone with < 20 hours per week). Because the plan DESIGN violates this requirement, it shouldn't matter whether or not a plan actually has anyone in this situation. For example, even if a 401k plan has never used profit sharing, it still cannot include a 5 year cliff vesting schedule. It cannot include a 2 year eligibility period on 401k for mailroom employees, even if the plan doesn't have anybody working in the mail room.

[Kevin C]

If you were discussing pre 2009, I agree. If you are talking post 2009, the situation is different. The regs say "... and, if any employee listed in paragraph (b)(4)(ii)(E) of this section has the right to have section 403(b) elective deferrals made on his or her behalf, then no employee listed in that paragraph (b)(4)(ii)(E) of this section may be excluded under this paragraph (b)(4)." I don't see anything in the regs that gives you an exemption if the person is required to be eligible to defer under ERISA, or if it was by mistake. If you find out about it in time, you just get the other <20 hour people to enroll. The correction for other people only happens if you don't find out in time to allow them to defer as soon as the one ineligible person deferred.

I'd love to interpret that part of the regs as applying to plan design rather than operation of the plan. But, that's not the way we are seeing the IRS interpret it. And, unfortunately, the IRS agent we are dealing with is the one who trains other agents in our region for 403(b) audits. He also speaks at some conferences.

If you've found something in Rev. Proc. 2008-50 that says you can correct by refunding deferrals to the ineligible person, please let me know where it is.

The document we had for the years under audit said you refund deferrals if an ineligible person is allowed to defer. The IRS agent insists that we can not do that. I spoke with one of the attorneys with the big name company that wrote the document to get him to represent our client. He wouldn't try to convince the IRS the plan provision was valid, but instead suggested we offer to correct under EPCRS by retroactively amending to allow the one NHCE in question to defer. Since this was all pre-2009, that could be done under a good faith interpretation of the rules.

[jpod]

I tend to agree with Austin that it is impossible to use the "less than 20" rule in an ERISA governed plan. That is because the language of the plan cannot, due to the Title I equivalent of 410(a), exclude someone under the "less than 20" rule, and you don't satisfy the "all or nothing" element of the "less than 20" rule if the document does not reflect that element.

With that said, let's get back to Austin's goal, which is to keep the plan population under the audit threshold. While it is cumbersome, can you separate your population by having two plans? The "main" plan is available to anyone who has satisfied the ERISA one year of service requirement. Entry into that plan can be deferred until the applicable bi-annual entry date, if the employer chooses to go that far. The other plan is available to anyone who is not eligible for the main plan. This should, as a practical matter, keep all or most of Austin's "less than 20" people out of the main plan.

[austin3515]

The Corbel document that we use allows us to use the 20 hour a week exclusion, so we are using it. Because let's be realistic, the entire country is using the exclusion, ERISA or not. We wouildn't have alot of clients if we told them all they couldn't do this or even if we recommend the two plan design (which by the way is very clever!).

Can anyone vouch for what the other major providers did in their prototypes?

Corbel: included the option for the 20 hour exclusion

TIAA/Ascensus: Did NOT include the option

Anyone know what Datair or McCay Hochman did? I'm wondering if TIAA is the only one that took that "conservative" position.

[TLGeer]

The Corbel document that we use allows us to use the 20 hour a week exclusion, so we are using it. Because let's be realistic, the entire country is using the exclusion, ERISA or not. We wouildn't have alot of clients if we told them all they couldn't do this or even if we recommend the two plan design (which by the way is very clever!).

Can anyone vouch for what the other major providers did in their prototypes?

Corbel: included the option for the 20 hour exclusion

TIAA/Ascensus: Did NOT include the option

Anyone know what Datair or McCay Hochman did? I'm wondering if TIAA is the only one that took that "conservative" position.

This impact is not inadvertent. The Regs. have a parenthetical that reads:

"(See, however, section 202(a)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) (88 Stat. 829) Public Law 93-406, and regulations under section 410(a) of the Internal Revenue Code applicable with respect to plans that are subject to Title I of ERISA.)"

This is a precise reference to the conflict. Whether any particular document provider has noticed the problem or not.

Tom Geer

[Guest Penelope]

I too have been puzzling over the conflict between the <20 hour exclusion and the ERISA year of service requirement and the impact of the "all or none" rule for application of the exclusion. I've heard that some consultants and benefits lawyers are taking the position that once a person enters the plan on account of having a year of service under ERISA, they are no longer a member of the <20 hour excluded class, so the all or nothing rule doesn't apply to them.

This seems like bootstrapping to me--has anyone else heard this rationale?