For-Profit Subsidiaries and 403(b) Plans

[401 Chaos]

I thought this was likely to be relatively straightforward but I am unfortunately not finding much guidance. Large, long-standing tax-exempt with 403(b) establishes a for-profit subsidiary and controls 100% of the for-profit's board so clearly part of the tax exempt's controlled group. All of the for-profit employees are initially coming by way of transfer from the tax-exempt entity and all were participants in 403(b) plan.

I have generally assumed that the for-profit would not be eligible to participate in the 403(b) plan because it is not tax-exempt. General plan was for employees changing employers to take a distribution from 403(b) and roll those into 401(k) plan to be set up by the for-profit. Now accountant is saying they don't think that should be necessary because the for profit is part of the controlled group and employees should be able to stay in and continuing making deferrals to 403(b).

I have found a couple of threads suggesting general consensus that for-profits are not eligible employers for 403(b) even if part of the controlled group but I really haven't found anything squarely addressing the situation. I did find an informal IRS response to a 2010 JCEB Q&A where the IRS seemed to clearly say all employers within a 403(b) needed to be tax-exempt to participate in the 403(b) but that was fairly informal and I'm just surprised there isn't anything more direct addressing what must be a fairly common situation.

Appreciate any assistance or referrals to useful guidance.

[jpod]

Doesn't the statute itself - IRC Section 403(b) - describe an exclusive list of employers whose employees can get the tax deferral offered by Section 403(b)? Why any need to look beyond that?

[Peter Gulia]

Consider 26 C.F.R. 1.403(b)-2(b)(8)(ii): "... a subsidiary or other affiliate of an eligible employer is not an eligible employer under paragraph (a)(8)(i) of this section if the subsidiary or other affiliate is not an entity described in paragraph (a)(8)(i) of this section."

[401 Chaos]

Thanks very much to both of you. I had started with the statute itself and thought that pretty clear but hadn't found the reg discussion. I will pass along to their benefits advisor from their Big 4 accounting firm that seems to think it might somehow be possible to get the for-profit in the 403(b). I think part of their thinking might have been that under the controlled group rules they might somehow extend the tax-exempt status to the affiliate but the regulatory provision seems to address that and the IRS seemed to also reject that sort of logic in the JCEB. Just glad to know we hadn't seemed to miss some loophole. Thanks.

[QDROphile]

Be careful about your plan for rollovers, Rollovers can occur only in connection with a distribution. The change of employment to the for-profit subsidiary may not be an event that enables distribution.

[Peter Gulia]

As a variation against the general principle jpod and I mentioned, there is one non-precedential letter ruling in which the IRS allowed 403(b) contributions for employees of a limited-liability company because, among other facts, the company was a disregarded person for Federal income tax purposes.

[401 Chaos]

Thanks. Aware of that one. For better or worse, that's not close to our particular facts and so have not really tried to factor that in..