401(k) for school employees?

[Guest kivey]

Are public schools eligible to offer 401(k) to their employees, and if so, can this be to the exclusion of the 403(B), or in addition to?

[Guest STLGiant]

Yes it can be offered, but you may want to check the contractual arrangements since many teachers can't utilize anything but salary deferral (as opposed to CODAs, e.g. a bonus deferral election). Providing a 401(k) with or without a match will result in sponsoring an ERISA plan. There are going to be annual administrative/recordkeeping expenses not currently realized by the district. Make sure they're aware of the cost!

Whether you sponsor the 401(k) instead of the 403(b), or both, the IRC 402(g) deferral election limitation governs an individual, not a plan, for the individual's calendar tax year (not the plan year). Therefore, the $10,500 is the TOTAL amount of pre-tax deferral into one, both or all pre-tax Cash or Deferred Arrangements . There may also be MEA issues in funding to $10,500 but that's another thread in and of itself. It should also be noted that many teachers have part-time jobs with companies that offer immediate eligibility to a 401(k) program (or self employment income perhaps deferred into another qualified 401(k) arrangement). Communication of IRC 402(g) and how it works is VERY, no EXTREMELY important!

You should consider the fact that 403(b) has a catch-up provision before you choose it over the 401(k). Granted if Pension Simplification passes and becomes law, everyone over 50 will be entitled to some form of catch-up whether they're in a 401(k) or 403(b). One school of thought illustrates that if there are many district employees within 10-15 years of retirement an analysis/survey should be performed to gauge the interest of the majority of employees in utilizing the catch-up provision.

If the majority of the employees have less than 5-10 years of service, it might not be necessary, since with their average compensations, it's difficult to save anything, let alone meet living expenses. FWIW

[Medusa]

I disagree with the above response. Public schools are governmental units and as such are precluded from sponsoring a 401(k) plan.

[Guest STLGiant]

While Medusa might disagree, perhaps she (?) should review the following quote...from our moderator Carol V. Calhoun

"The attractiveness of a 457 plan as compared with a 403(B) plan or a 401(k) plan may vary greatly depending on the circumstances. For example, a state or local governmental entity other than a public school or university may need to have a 457 plan, because it cannot normally have either of the other types of plans."

For full article, see http://benefitsattorney.com/choice.html

The key phrase being "other than a public school or university".

FWIW

[QDROphile]

Medusa is correct. See section 401(k)(4)(B) of the Internal Revenue Code. You are misreading Ms. Calhoun's statement.

[Guest STLGiant]

You're both right and I stand corrected. I guess I was thinking about that grandfathered rule allowing public schools the ability to sponosr a 401(k).

Didn't that have a short window effective date, something about having to make the election effective some day during the a summer month of 1986?

[Ellie Lowder]

Public Education Institutions who sponsored 401(k) plans prior to 5/6/86 are grandfathered, e.g., can keep them. Some have them. Otherwise, governmental groups are not eligible to establish a 401(k) plan!

[Carol V. Calhoun]

Just a clarification on the quotation from my comparison of 401(k), 403(B), and 457 plans : A state or local governmental entity other than a public school or university cannot have either a 401(k) plan (unless it meets the grandfather rule described above) or a 403(B) plan (unless it is a governmental instrumentality that has also obtained 501©(3) status). A public school or university run by a state or local government can have a 403(B) plan even if it does not have 501©(3) status, but cannot have a 401(k) plan unless it is grandfathered. And just to complicate things still further, the rules are different for federal governmental entities.

Note, however, that it is the state and/or local governmental employer, not just the plan, which is grandfathered. See PLR 200028042 (April 19, 2000), in which the entire state of Idaho and various local governments within Idaho were permitted to adopt a 401(k) plan based on the fact that two Idaho state agencies, which were treated as part of the same "employer," had one as of the grandfathering date.

[jlf]

Must ERISA coverage apply to governmental employers as a condition precedent for such employers to offer a 401(k)?

Best wishes,

Joel L. Frank

[Carol V. Calhoun]

No, ERISA coverage is not a precondition for offering a 401(k) plan. For example, a federal government agency, an international organization, a state or local entity with a grandfathered 401(k) plan, or a Native American tribe would not be subject to ERISA coverage, but could have a 401(k). Other state or local government entities are barred from establishing a 401(k) plan by the terms of 401(k) itself, not by their exemption from ERISA.

[Carol V. Calhoun]

Ellie and STLGiant, actually a state or local organization that had a 401(k) plan prior to 5/6/86 not only can keep its existing 401(k) plan, but can establish a new one (as a successor to the old one, for a different group of employees, or whatever). This was what the state of Idaho did in PLR 200028042 (April 19, 2000 ). Two Idaho state agencies had maintained 401(k) plans as of 5/6/86, so the state of Idaho was able to establish a new 401(k) plan, covering the employees of both state and local governments. This, of course, means that there is a big premium put on the definition of "employer," because an employer with a 401(k) plan can start a new 401(k) plan and/or can add new employees of the same employer to the 401(k) plan, but a state or local governmental employer without one cannot start a new 401(k) plan.

In this connection, you might be interested in the "Fields letter ," an IRS general information letter that discussed the definition of "employer" in a governmental context. The Fields letter dealt specifically with 415 issues, but we have been successful in getting the IRS to apply it in other contexts.