Comp Exclusions for Deferrals

[Guest Serena]

In order to not violate universal availability, does anyone believe that a 403b plan cannot therefore allow exclusions from compensation for deferral purposes - i.e. exclude bonuses or commissions from deferrals? As long as the plan is offered to you, does not matter that a portion of your pay is not eligible?

[mbozek]

In order to not violate universal availability, does anyone believe that a 403b plan cannot therefore allow exclusions from compensation for deferral purposes - i.e. exclude bonuses or commissions from deferrals? As long as the plan is offered to you, does not matter that a portion of your pay is not eligible?

Why does the plan want to limit the comp included for deferral purposes since there is no ADP testing and NPs prefer 403b plans to 401k plans because the HCEs can defer the max $16,500 (22,000 if 50) regardless of the level of deferral by NHCEs?

[Guest Serena]

I agree, why limit it. But we have large hospital with unusual forms of pay, and I think for administrative reasons more than anything else, do not want to run this form of pay through the plan.

[Guest Serena]

What if the exclusion is discriminatory? Do you still apply comp ratio test to the deferrals? I assume yes, just no ADP test?

[Guest Matthew Gouaux]

Many 403(b) plans exclude certain forms of compensation, perhaps for administrative convenience. You will need to test to make sure the compensation definition does not violate the nondiscrimination rules.

[TLGeer]

Many 403(b) plans exclude certain forms of compensation, perhaps for administrative convenience. You will need to test to make sure the compensation definition does not violate the nondiscrimination rules.

Do you think this issue is affected by the 4th sentence of Regs. 1.403(b)-5(b)(2)? That sentence says:

"Further, an effective opportunity includes the right to have section 403(b) elective deferrals made on his or her behalf up to the lesser of the applicable limits in §1.403(b)-4© (including any permissible catch-up elective deferrals under §1.403(b)-4©(2) and (3)) or the applicable limits under the contract with the largest limitation, and applies to part-time employees as well as full-time employees."

Set aside the question of what they mean by "the contract with the largest limitation." Suppose the exclusion of part of a participant's compensation made it impossible to make a deferral to the maximum required under that sentence. Then what? In other words, is this another situation like the part-time employee exclusion that can't, as a practical matter, be used under a plan subject to ERISA?

Tom Geer

[30Rock]

Good point. I guess you could exclude from HCE comp because you know they have effective opportunity to defer the max. Other than that, it appears not.

[TLGeer]

Good point. I guess you could exclude from HCE comp because you know they have effective opportunity to defer the max. Other than that, it appears not.

Or have a minimum maximum. "Exclude ______ except to the extent it would cause a reduction in the maximum allowable contribution to an amount less than the lesser of the applicable limits in §1.403(b)-4© (including any permissible catch-up elective deferrals under §1.403(b)-4©(2) and (3)) or the applicable limits under the contract with the largest limitation." Clumsy, probably impossible to administer with consistent accuracy, and still subject to attack. The attack would be based on participants whose projected compensation eligible for deferral would exceed the limitation but who terminate before that is true for the year. To avoid even that, you would have to exclude the category of compensation only after, in time, the participant had the opportunity to make a deferrals in the required amount, which I can't imagine anybody getting done right.

I'm rather be wrong, but this is certainly an issue. Anybody who disagrees, please put out your reasons.

Tom

[Guest newbenefitsguy]

Anyone else have opinions on this? I've been looking into this issue and there is a scarcity of information available on the subject (and the IRS does not talk about universal availability in the context of exclusions from comp). And the 403(b) plans we've been seeing provide options for excluding items of compensation.