403(b) Employer Contributions and VCP

[Randy Watson]

Sponsor improperly excluded eligible employees from participating in a 403(b) that also provides for nonelective contributions. From what I can see the Universal Availability rule applies to salary deferrals only. I'm unable to find eligibility rules under 403(b) for employer contributions. I understand that once you make employer contributions you become subject to ERISA (with a few exceptions) and would have to follow the age 21 and 1 year of service eligibility rule for employer contributions.

I can correct the failure under VCP with regard to salary deferrals. The sponsor would also like to correct the failure to make employer contributions. My problem is that I'm not seeing a 403(b) violation with regard to those employer contributions as there is no eligibility requirement (that I can find) under 403(b) for employer contributions. With no 403(b) violation I don't see how I can correct this specific issue under VCP. Can anyone see a correctable violation of 403(b) here?

[Kevin C]

I may not understand the question, but it sounds like you have an Operational Failure with the employer contributions because the terms of the plan were not followed. I don't see why it would matter that the plan was not required to have those provisions. Whether you can correct under SCP or have to use VCP is another issue.

[Randy Watson]

I may not understand the question, but it sounds like you have an Operational Failure with the employer contributions because the terms of the plan were not followed. I don't see why it would matter that the plan was not required to have those provisions. Whether you can correct under SCP or have to use VCP is another issue.

Well, that's actually another problem. There was no "plan document" when these "failures" occured.

[Kevin C]

What do you have for the prior years?

[Randy Watson]

I spoke with the IRS on this issue. For pre-2009 years, there is no 403(b) failure for not making employer contributions, even if there was a plan document that required the contribuitons. This is strictly an ERISA violation and therefore it is not eligble for correction under 2008-50. The only way to get the IRS blessing is to show that the failure to make the contributions resulted in failed 401(m) discrimination test and the correction is necessary to pass the test.

As Kevin C noted, you would have a 403(b) violation for failing to follow the terms of the plan for 2009 and subsequent years due to the Final Regulations. You can submit under VCP for those years.