Contributions Based on Deferral Election

[401_noob]

Are there regs similiar to IRC 401(k)(4)(A) or Treasury Regulation 1.401(k)-1(e)(6) that apply to a 403(b) plan that prohibit a benefit be provided based on the participant's election to defer to a 403(b) Plan?

Thanks!

[ETA Consulting LLC]

This is a good question. I think that is called the contingent deferral rule in 401(k) that, basically, says that a matching contribution is the only thing that can be based on an employees deferral. Hence, you may not base a non-elective contribution on whether or not the employee defers; as doing so would violate this rule.

Additionally, when you look at 401(m)(4)(A) of the IRC which defines "match", it is any employer contribution made on account of an employee contribution or deferral. So, arguably, if you based making a contribution on whether or not the employee contributed, then it must be a match.

That would be my argument. Good question!

Good Luck!

[MWeddell]

The contingent benefit rule does apply to 403(b) plans. See Treas. Reg. 1.403(b)-5(b)(2)(last sentence).

[401_noob]

That is exactly what I was looking for, thanks ETK and MWeddell.

However, I failed to mention that this is for a church plan, so does this rule not apply per Treas. Reg. 1.403(b)-5(d)?

Thanks!

[MWeddell]

The contingent benefit rule does not apply to plans sponsored by a "church" or a "qualified church-controlled organization." I don't mean to quibble, but those definitions are narrower than the ERISA Seciton 3(33) definition of "church plan," so you can't gloss over the details.

[Belgarath]

What if the contribution in question is an employer discretionary contribution? For example, the plan has each participant in their own classification for purposes of employer discretionary contributions. These contributions have NOTHING to do with whether the employee DEFERS in the 403(b) or not. However, they are based on whether the employee takes the employer-offered health insurance. So if you take the health insurance, no employer contribution to the 403(b). If you don't take the health insurance, you get an employer contribution of "x."

While this seems to satisfy the letter of the "contingent benefit" rule in 1.403(b)-5(b)(2), it doesn't seem right somehow. It almost seems like a "sideways" impermissible CODA, although there is no option to take the funds in "cash" - any thoughts on this?

[Belgarath]

Although it still doesn't "feel" right, darned if I can find anything prohibiting it. And since no HCE's, coverage/nondiscrimination testing isn't an issue.