403(b) Plan and Money Purchase Plan

[Belgarath]

Ran into a very odd (to me, anyway) situation yesterday. A non-profit corporation has an ERISA 403(b) plan, which is deferral only, immediate entry, with some excluded classes, but has the "fail-safe" language so that if anyone in these classes ever works 1,000 hours, they are in.

The Money Purchase plan is unusual. 1 year/21 for eligibility, once eligible, no service or last day requirement to share. But, the employer contribution is a fixed 9%, but it is contributed ONLY to anyone deferring 3% or more to the 403(b) plan. It states that this contribution shall be considered a matching contribution for ACP testing purposes.

Now, don't ask me why it was designed or set up this way in the dim and distant past - I have no idea.

I think, in spite of the odd formula, that this satisfies the "definitely determinable" formula requirement of 1.401-1(b), but I haven't yet considered how this would work for coverage or nondiscrimination testing.

Anyone have any thoughts they care to share, or have you handled/encountered one like this?

Just had a chance to look at this in a little more depth for the first time. Turns out that (for now at least) coverage/nondiscrimination testing isn't even an issue, as there are no HC whatsoever! But based on the census/participation, looks like they would pass anyway. Strange case...

[Kevin C]

We used to have a client with a pair of plans like that. The person who set the plans up edited a standardized prototype MP adoption agreement to make the contribution a match on the deferrals in the 403(b). No, they did not submit for a determination letter. When we took over the plans, we restated using a VS MP document modified to include the necessary match language, submitted it as a minor modifier and received a determination letter. Other than the document being a pain and the match being subject to the QJSA rules and MP in-service distribution restrictions, it worked basically the same as it would have if the match had been set up using a PS or 401(k) document. With the last restatement I did, the agent reviewing the determination letter request said she thought it didn't qualify as a minor modification, but relented when I reminded her it was approved that way for the prior restatement.

[Belgarath]

Interesting. I'm not even sure submission for a d-letter is necessarily required in this case - base document includes both MP and PS/401(k), so has required ACP language, and I think the MP formula can just be entered in the "other" option in the MP AA. But I'll have to look into it in greater depth. I'm just glad to know someone out there has at least seen the same thing!

I'm sure there was a good reason for doing this way back when, but I'm having a hard time figuring it out...and it doesn't much matter at this point - have to play the hand you are dealt!

Thanks Kevin.

[Flyboyjohn]

Hopefully the client is filing 5500s for the 403b and not contending non-ERISA status?

[Belgarath]

Yes, it is considered ERISA 403(b) and 5500's have been filed as required.

[Doghouse]

If we did have HCE's, could we not have a discriminatory rate of match issue, since it's non-uniform?

[Belgarath]

Maybe I'm misunderstanding your question, but I don't think so. "Rate" of match actually effectively goes down as deferral rate (over 3% threshold, below which there's no match at all) increases.

[Doghouse]

Rate of match at 2% deferral is 0%. At 3% there is a match. That is an increase.

[Belgarath]

Ok, I see what you are saying. Point well taken, and I haven't considered it, but probably won't take the time at this point, since it is N/A in this situation anyway. But I'll keep it in mind! Thanks.