Dual Status 403(b) Plan

[oldman]

We have a 403(b) plan sponsored by a governmental entity, claiming to be a 501©(3) tax exempt entity but exempt from ERISA, that provides participants receiving an employer matching contribution are not eligible for the employer nonelective contributions and participants receiving employer nonelective contributions are not eligible for employer matching contributions. Recognizing that governmental plans are not subject to §401(a)(4) nondiscrimination rules, I believe this plan design is permissible.

Do you agree?

[mbozek]

We have a 403(b) plan sponsored by a governmental entity, claiming to be a 501©(3) tax exempt entity but exempt from ERISA, that provides participants receiving an employer matching contribution are not eligible for the employer nonelective contributions and participants receiving employer nonelective contributions are not eligible for employer matching contributions. Recognizing that governmental plans are not subject to §401(a)(4) nondiscrimination rules, I believe this plan design is permissible.

Do you agree?

Its my understanding that a government owned entity such as a hospital can be designated as a 501c3 tax exempt organization while retaining its goverment status.

[oldman]

We have a 403(b) plan sponsored by a governmental entity, claiming to be a 501©(3) tax exempt entity but exempt from ERISA, that provides participants receiving an employer matching contribution are not eligible for the employer nonelective contributions and participants receiving employer nonelective contributions are not eligible for employer matching contributions. Recognizing that governmental plans are not subject to §401(a)(4) nondiscrimination rules, I believe this plan design is permissible.

Do you agree?

Its my understanding that a government owned entity such as a hospital can be designated as a 501c3 tax exempt organization while retaining its goverment status.

Acknowledging the plan is sponsored by a governmental entity, do you find any problem in how the employer contributions are allocated as noted above?

[Guest cbclark]

M: Could you shed a little more light on this? I posed the question to Carol Calhoun a couple of years ago about this interface and she indicated that it was not exactly clear that the governmental entity got to keep all the governmental status "perks" in the 403(b) context, since the limited nature of the governmental 403(b) precluded the establishment of a 403(b) plan by, for example, a county hospital. To sponsor the 403(b) the hospital had to have its own 501© status. We have opted to treat the governmental entity as ERISA covered for 403(b) purposes when there is employer involvement (like the match) and not as ERISA covered for other plans it sponsors (such as the pension plan). It is a bit unwieldy but we erred on the side of caution. I would love to have something that supports your position! Thanks in advance!

[mbozek]

M: Could you shed a little more light on this? I posed the question to Carol Calhoun a couple of years ago about this interface and she indicated that it was not exactly clear that the governmental entity got to keep all the governmental status "perks" in the 403(b) context, since the limited nature of the governmental 403(b) precluded the establishment of a 403(b) plan by, for example, a county hospital. To sponsor the 403(b) the hospital had to have its own 501© status. We have opted to treat the governmental entity as ERISA covered for 403(b) purposes when there is employer involvement (like the match) and not as ERISA covered for other plans it sponsors (such as the pension plan). It is a bit unwieldy but we erred on the side of caution. I would love to have something that supports your position! Thanks in advance!

The following is what I found in a 5 minute google search:

1. IRS pub 557 section 3, Section 501©(3) organizations states the following:

"A state or municipal instrumentaility may qualify as a 501©(3) organization if it is organized as a seperate entity from the government unit that created it and meets the other tests of a 501©(3) entity. Examples include ... hospitals."

2. ERISA section 4(b) exempts governmental plans from regulation under ERISA. Section 3(32) of ERISA defines a governmental plan "as any plan established or maintained for its employees by the ... government of any state or political subdivision or by any agency or instrumentality of any of the foregoing."

Taking 1 and 2 togeter it appears that a local government can establish a public hospital which is an instrumentality of the local government as a 501©(3) organization and the hospital can establish a 403b plan exempt from ERISA since the hospital is a government instrumentality.

Q Did you have legal counsel review this matter before taking the course of action to regulate the plan as subject to ERISA?

[Guest cbclark]

M: Could you shed a little more light on this? I posed the question to Carol Calhoun a couple of years ago about this interface and she indicated that it was not exactly clear that the governmental entity got to keep all the governmental status "perks" in the 403(b) context, since the limited nature of the governmental 403(b) precluded the establishment of a 403(b) plan by, for example, a county hospital. To sponsor the 403(b) the hospital had to have its own 501© status. We have opted to treat the governmental entity as ERISA covered for 403(b) purposes when there is employer involvement (like the match) and not as ERISA covered for other plans it sponsors (such as the pension plan). It is a bit unwieldy but we erred on the side of caution. I would love to have something that supports your position! Thanks in advance!

The following is what I found in a 5 minute google search:

1. IRS pub 557 section 3, Section 501©(3) organizations states the following:

"A state or municipal instrumentaility may qualify as a 501©(3) organization if it is organized as a seperate entity from the government unit that created it and meets the other tests of a 501©(3) entity. Examples include ... hospitals."

2. ERISA section 4(b) exempts governmental plans from regulation under ERISA. Section 3(32) of ERISA defines a governmental plan "as any plan established or maintained for its employees by the ... government of any state or political subdivision or by any agency or instrumentality of any of the foregoing."

Taking 1 and 2 togeter it appears that a local government can establish a public hospital which is an instrumentality of the local government as a 501©(3) organization and the hospital can establish a 403b plan exempt from ERISA since the hospital is a government instrumentality.

Q Did you have legal counsel review this matter before taking the course of action to regulate the plan as subject to ERISA?

Thanks. We were not having issues with the establishment of the 403(b) plan because the entity had its own tax exempt status. Since the 403(b) plan had employer money it morphed into a covered plan.....the issues were more along the lines of explaining to the client that it would have to file 5500s for one plan and not the other.

[mbozek]

M: Could you shed a little more light on this? I posed the question to Carol Calhoun a couple of years ago about this interface and she indicated that it was not exactly clear that the governmental entity got to keep all the governmental status "perks" in the 403(b) context, since the limited nature of the governmental 403(b) precluded the establishment of a 403(b) plan by, for example, a county hospital. To sponsor the 403(b) the hospital had to have its own 501© status. We have opted to treat the governmental entity as ERISA covered for 403(b) purposes when there is employer involvement (like the match) and not as ERISA covered for other plans it sponsors (such as the pension plan). It is a bit unwieldy but we erred on the side of caution. I would love to have something that supports your position! Thanks in advance!

The following is what I found in a 5 minute google search:

1. IRS pub 557 section 3, Section 501©(3) organizations states the following:

"A state or municipal instrumentaility may qualify as a 501©(3) organization if it is organized as a seperate entity from the government unit that created it and meets the other tests of a 501©(3) entity. Examples include ... hospitals."

2. ERISA section 4(b) exempts governmental plans from regulation under ERISA. Section 3(32) of ERISA defines a governmental plan "as any plan established or maintained for its employees by the ... government of any state or political subdivision or by any agency or instrumentality of any of the foregoing."

Taking 1 and 2 togeter it appears that a local government can establish a public hospital which is an instrumentality of the local government as a 501©(3) organization and the hospital can establish a 403b plan exempt from ERISA since the hospital is a government instrumentality.

Q Did you have legal counsel review this matter before taking the course of action to regulate the plan as subject to ERISA?

Thanks. We were not having issues with the establishment of the 403(b) plan because the entity had its own tax exempt status. Since the 403(b) plan had employer money it morphed into a covered plan.....the issues were more along the lines of explaining to the client that it would have to file 5500s for one plan and not the other.

I dont understand what you are saying. If the entity sponsoring the 403b plan is exempt from ERISA because it is a government instrumentality then all plans of the entity are exempt from ERISA b/c gov. plans are statutorily exempt from all requirements of ERISA including filing 5500. A gov. instrumentality cannot maintain a pension plan exempt from ERISA but choose to maintain a 403b plan with employer matching contributions to be subject to ERISA because ERISA does not apply any plan maintained by the gov. entity. Both plans will be exempt from ERISA b/c a gov. plan cannot waive its exemption from ERISA.

The problem you are ignoring is that the 403b plan is subject to state laws regarding its benefits, which may conflict with provisions required under ERISA. Since the plan is not subject to ERISA, ERISA would not preempt applicable state laws such as laws requiring forfeiture of benefits which result from conviction of a crime.

Q how did you explain the difference in treatment? Is the hospital not contributing to the pension plan?