403(b) Cash or Deferred?

[Patricia Neal Jensen]

Nonprofit (501(c )(3)) plan sponsor provides a lump sum numberto each employee representing an amount which can be contributed to the HSA or, if not, to the 403(b ) plan.  It has always been my opinion that such a choice makes this money, when contributed to the 403(b ) plan, an employee contribution because of the old cash or deferred rules.  The employer would like it to be deemed an employer contribution.  We could insert a Non-Elective provision with individual groups and test it, but I am just not certain that the fundamental question and answer are correct.

Please share your thoughts!  Thank you.

Patricia Neal Jensen

 

[Belgarath]

I agree. You might be able to get away with a "one time irrevocable election" where an employee initially elects NEVER to contribute to the HSA and to always have the full amount contributed to the 403(b) (subject to applicable limitation) but that's the only way I can see to get around it.

[QP_Guy]

Hmmm, maybe you could get there, with some gymnastics...

First, if the employer made an HSA contribution to all HDHP participants, and then a 403(b) employer contribution to all those who are not HDHP, that should work to avoid the deemed CODA issues. (Use individual allocation groups for the 403(b) employer contribution.)

If you exclude HCEs from the mix, then you don't have any discrimination testing issues. 

Then you could 457 the same dollar amount to all the excluded HCEs.

That's not precisely what you asked for, but it's dang close!

[Patricia Neal Jensen]

Thanks!  Our attorney says HSA = cash so the "open choice" which this client prefers to use (participant is told that they can choose how much of the money set aside for this goes to 403(b)) is CODA.

We do not have HCE's in this plan so no testing concerns. 

Thanks again! 

Patricia

[loserson]

My first instinct is this is a conditioning problem but maybe if you work through the regs, then it might be okay because the HSA is not an ERISA plan.  I feel weird because this was not exactly a "salary" reduction, because this was not salary.  It just feels too cute, is my first impression before digging through the reg.

Why do they do it this way?  Why not just pick between: (1) giving everybody a salary increase equal to the 401(b)/HSA contribution amount and then let them handle their own elections, and (2) giving everybody a 403(b) NEC equal to the same amount.

If it's nonprofit, my guess is that everybody is kinda low paid, so maybe not everybody can afford the HSA contribution if the money goes into the 403(b)?

Technically it is better for a nonprofit to pay less FICA, so the HSA contributions are better for the employer than the 403(b) because §125 HSA contributions reduce FICA obligations.  But the dollar amounts might not be very big unless it's a lot of contributions.

Not sure why they want to claim employer 403(b) contributions, is there a 990 consideration?  Are they looking to report themselves as more generous employers?