ERISA 403(b) Compliance Plan design considerations for tax-exempt organizations

Transcription

1 ERISA 403(b) Compliance Plan design considerations for tax-exempt organizations Wayne McClain III, JD Senior Counsel / AVP / CCO Lincoln Financial Group, Retirement Plan Services

2 Wayne McClain III, JD Senior Counsel / AVP / CCO Lincoln Financial Group, Retirement Plan Services Wayne McClain is Senior Counsel / AVP for Lincoln Financial Group focusing his practice on retirement benefit plans. He has a 20-year background in tax, ERISA and compliance aspects of qualified and non-qualified retirement plans with special emphasis on retirement plans for tax-exempt and governmental entities. He has extensive experience in both the national law firm and national insurance company settings, including as Senior Counsel for several American International Group (AIG) companies, including The Variable Annuity Life Insurance Company (VALIC) and SunAmerica Financial Group. 2

3 Wayne McClain III, JD Senior Counsel / AVP / CCO Lincoln Financial Group, Retirement Plan Services In addition to his experience as an employee benefits attorney, McClain has significant experience managing the administration and compliance of multi-billion dollar benefit plans in higher education. McClain was the Director of Benefits Plan Administration and Compliance for the University of Illinois and the University Director of Retirement Program Services for Indiana University. His experience in managing benefit plans for major state universities has given him a unique insight into the distinct needs of and challenges faced by tax-exempt and governmental plan sponsors in benefit plan administration and compliance. McClain is a graduate of Indiana University, The Philadelphia Institute, and the Indiana University Robert H. McKinney School of Law. McClain is currently pursuing an LL.M. in employee benefits from the John Marshall Law School in Chicago, Illinois. 3

4 Plan design options for tax-exempt organizations Today s focus Key differences between 403(b) and 401(k) plans Ways to pair a 403(b) plan with another plan Current trends 4

5 Plan design options for tax-exempt organizations Our discussion is associated with 501(c)(3) tax-exempt organizations. Which types of plans can a 501(c)(3) tax-exempt organization sponsor? 401(k) 401(a) (profit sharing / money purchase / defined benefit) 403(b) 457(b) Top Hat 457(f) Top Hat Note: A number of tax-exempt organizations sponsor 403(b), 401(a) and 457(b) Top Hat plans. 5

6 403(b) plans ERISA vs. non-erisa 403(b) plans ERISA or non-erisa Subject to ERISA means participants benefits and rights are protected. These rights include eligibility, participation, funding, reporting, disclosure, anti-alienation, anti-assignment, bonding and fiduciary duty. 403(b) plans may be exempt from ERISA requirements if certain conditions are met. Regulatory exemption The employer cannot exercise discretionary authority and decision-making. Additional factors must be considered. Statutory exception This applies to governmental plans and non-electing church plans. 6

7 403(b) vs. 401(k) Basic differences General requirements ERISA 403(b) plan 401(k) plan Who can sponsor? Section 501(c)(3) tax-exempt organization, educational institution, or electing church employer Any business entity, including tax-exempt organization, corporation, partnership, or sole proprietor Note: A governmental entity is ineligible to sponsor a 401(k) unless the plan is grandfathered. Funding vehicle and investment options Written plan document Annuity contract that satisfies Section 403(b)(1) or mutual funds held in a Section 403(b)(7) custodial account Required Group annuity contract or trust that may hold investments such as mutual funds, nonregistered separate accounts, stocks, bonds, or employer securities Required 7

8 403(b) vs. 401(k) Basic differences Who can sponsor? Only certain tax-exempt and governmental entities may sponsor 403(b) plans 501(c)(3) No other tax-exempt organizations Public schools and certain governmental entities Please note: There are a number of organizations under 501(c); those sponsoring 403(b) plans must fall under 501(c)(3). Governmental entities are employers who have a dual status as both non-profit 501(c)(3) and governmental. These organizations may sponsor both 403(b) and 457(b) governmental plans. 8

9 403(b) vs. 401(k) Basic differences Funding vehicles 403(b) Annuity and/or custodial accounts 401(k) Group annuity or trust More flexibility and options for participants stocks, bonds brokerage account. Plan design consideration If an employer or key decision-maker wants flexibility and access to stocks and bonds, then a 401(k) plan is most likely the best option. 9

10 403(b) vs. 401(k) Basic differences Eligibility and entry requirements Eligible employee Entry requirements ERISA 403(b) plan Salary deferrals universally available ; exclusions include: Employees normally scheduled < 20 hours/week Student employees Nonresident aliens without U.S. source income Employees covered under other 401(k), 403(b), or 457(b) governmental plans Employees with deferrals < $200 Employer contributions: Exclusions allowed provided Section 410(b) minimum coverage passed Salary deferrals: Age and/or service requirement not permitted Employer contributions: Age and/or service requirement permitted Maximum age requirement of 21 years Maximum requirement of 1 year of service; 2 years if full and immediate vesting 401(k) plan All contributions available to all employees; exclusions include: Statutory exclusions: Nonresident aliens without U.S. source income Collectively bargained employees Non-statutory exclusions: Exclusions allowed provided Section 410(b) minimum coverage test passed Salary deferrals: Age and/or service requirement permitted Maximum age requirement of 21 years Maximum requirement of 1 year of service Employer contributions: Age and/or service requirement permitted Maximum age requirement of 21 years Maximum requirement of 1 year of service; 2 years if full and immediate vesting 10

11 403(b) vs. 401(k) Basic differences 403(b) Universal availability What does that mean? Every employee (with limited exceptions) must be allowed to make salary deferrals to the plan. Please note: The Actual Deferral Percentage test (ADP) does not apply. Exclusions allowed o Employees scheduled to work fewer than 20 hours per week o Student employees (for education organizations) o Employees covered under other plans o Employees with deferrals of less than $200 per year Employer contributions (matching and non-elective) The same rules and testing apply to both 403(b) and 401(k) plans. Plan design consideration A 401(k) plan may be the best option if the employer intends to exclude employees from being able to make salary deferrals to the plan (410(b) minimum coverage applies). But why? 11

12 403(b) vs. 401(k) Basic differences Plan design considerations Safe harbor design Vesting ERISA 403(b) plan Allowed deemed to have passed the Actual Contribution Percentage test (ACP) Salary deferrals: o Full and immediate 401(k) plan Allowed deemed to have passed the ADP and/or the ACP test Salary deferrals: o Full and immediate Employer contributions: o Maximum 3-year cliff or 6-year graded vesting schedule Employer contributions: o Maximum 3-year cliff or 6-year graded vesting schedule Plan-to-plan transfers transfers replaced with contract exchanges and plan-to-plan transfers Transfers allowed between 401(k) plans in certain circumstances 12

13 403(b) vs. 401(k) Basic differences ADP and ACP testing 403(b) ADP does not apply 401(k) ADP and ACP test applies Please note: Safe harbor plan option/rules apply to both. Exchanges and transfers 403(b) contract exchange vs. 403(b) plan-to-plan transfer What s the difference? When do these occur? Plan design considerations A 403(b) offers an advantage in that HCEs may defer the maximum each year (without fear of refunds for deferrals). The rules/requirements concerning exchanges and transfers are mostly for the initial setup (multiple vendors) and the day-to-day operation of a 403(b) plan. 13

14 403(b) vs. 401(k) Basic differences Contribution limits Please note: Generally, the 415 limit applies individually to each plan ( control exception). In 2017, an employee may receive $54,000 in each type of plan. The 402(g) limit requires aggregation of the deferrals made to all 403(b) and 401(k) plans for the calendar year. For 2017, an individual s limit to defer in both plans is $18,000 exclusive of catch-up contributions. ERISA 403(b) plan Contribution limits 415 limit the lesser of 415 compensation or the 415 limit as indexed; 2017 limit is $54,000 Includes employee and employer contributions Excludes age 50 catch-up contributions Please note: The 15-year special catch-up is included in the 415 limit. 401(k) plan 415 limit the lesser of 415 compensation or the 415 limit as indexed; 2017 limit is $54,000 Includes employee and employer contributions Excludes age 50 catch-up contributions Roth Permitted Permitted Catch-up contributions Age 50 catch-up permitted 15-year special catch-up permitted for certain employers and specific service and contribution requirements Qualifying employees may contribute up to $3,000 more than the applicable 402(g) limit Age 50 catch-up permitted 14

15 403(b) vs. 401(k) Basic differences Contribution limits and aggregation among plans 402(g) limit Individual calendar-year limit includes contributions to both 401(k) and 403(b) 457(b) NOT included in the 402(g) dollar limit (separate limit applies for 457 plans and 403(b)/401(k) plans 415 limit Applies separately to 403(b) and 401(k) plans (with certain exceptions) Plan design consideration Employees may be able to maximize contributions if an employer sponsors either a 403(b) or 401(k) and a 457(b) Top Hat plan. It s possible to maximize employer contributions by using both 403(b) and 401(a)/(k) plans. 15

16 403(b) vs. 401(k) Basic differences 403(b) 15-year special catch-up provision Rules/requirements o o o o o o Counted service Employment with a qualified organization only. Years of service At least 15 years of service with the current employer. Part-time employees? Eligibility to utilize An employee must not have contributed on average more than $5,000 or more for each year of service to any elective deferral plan of the employer, including 401(k), SARSEP and SIMPLE. Contribution limit An eligible participant may be able to defer an additional $3,000 each year under this provision. Lifetime catch-up limit The total aggregate amount that may be contributed under this 15-year special catch-up is $15,000. Interaction with age 50 catch-up The 15-year special catch-up provision is required to be used first. 16

17 403(b) vs. 401(k) Basic differences 403(b) 15-year special catch-up provision (cont d.) Should an employer offer this provision? o o Advantage: May allow a participant to defer additional amounts to the plan. Note: $5,000 average deferral limit may prevent an employee from using it Disadvantages: Requires calculation and maintenance of employee records for a period of at least 15 years. In addition, an auditor may focus on this provision in order to determine whether it s being calculated and handled correctly. Did the age 50 catch-up provision eliminate the need for a 15-year special catch-up? Trend: Some employers are removing the 15-year catch-up from 403(b) plans. Please note: This is not considered a 411(d)(6) protected benefit. Plan design consideration No longer considered a significant advantage for 403(b) plans due to changes in employee work history, age 50 catch-up option, the burden to the employer, and more. 17

18 403(b) vs. 401(k) Basic differences Testing requirements Nondiscrimination testing ERISA 403(b) plan Salary deferrals Universal availability requirement No formal test 401(k) plan Salary deferrals ADP test 410(b) minimum coverage Employer matching contributions ACP test 410(b) minimum coverage test Employer matching contributions ACP test 410(b) minimum coverage test Employer non-elective contributions 401(a)(4) general test 410(b) minimum coverage test Employer non-elective contributions 401(a)(4) general test 410(b) minimum coverage test Note: Benefit, right or feature test may apply. Note: Benefit, right or feature test may apply. Top-heavy rules Not applicable Applicable unless plan meets exception available for 401(k) safe harbor plan design 18

19 403(b) vs. 401(k) Basic differences Testing requirements 403(b) advantage No ADP test No top-heavy test Plan design considerations As noted earlier, 403(b) offers an advantage for HCEs since no test is applicable to salary deferrals. The top-heavy test doesn t apply. (Consider the definition of key employees.) 19

20 403(b) vs. 401(k) Basic differences Reporting and disclosure requirements ERISA 403(b) plan Form 5500 Required Required 401(k) plan Audit requirement Required if plan has more than 100 lives Required if plan has more than 100 lives Participant disclosure and notice requirements o Summary Plan Description (SPD)/ summary of material modification (SMM) o Summary annual report (SAR) o Benefit statements o Fee disclosure o Special tax notice o Universal availability notice Same, except universal availability does not apply. In addition, employer stock diversification may apply. The following may apply: o Safe harbor notice o Automatic enrollment o QDIA o Blackout/SOX notice 20

21 403(b) vs. 401(k) Basic differences Reporting and disclosure Main difference is universal availability What does the employer need to do to meet the universal availability requirement? Is there an annual notice requirement? What are best practices? What does the auditor or agent look for or expect to see? Plan design consideration The primary consideration is how to communicate to employees about their options/abilities to make salary deferrals to the 403(b) plan. 21

22 Additional plan design considerations Additional plan design considerations Why would an eligible organization adopt a 401(k) plan rather than a 403(b) plan? Can it be advantageous to sponsor both a 401(k) or 401(a) plan and a 403(b) plan? What are plan design options and considerations for mergers and acquisitions? 22

23 401(k) or 403(b) Why would an eligible organization adopt a 401(k) plan rather than a 403(b) plan? Lack of understanding or possible assumption that a 401(k) is better Eligibility or possible exclusion of certain employee classes/groups for salary deferral purposes Universal availability requirement vs. ADP testing May be able to project results and determine which option is better Different investment options or the ability to utilize certain types of investments 23

24 Maintain multiple plans Is it advantageous to maintain a 403(b) and a 401(k) or 401(a) plan? Same 402(g) elective deferral limit applies to both plans Different 415 annual additions limit for each plan (with exceptions) Additional considerations A number of nonprofit employers still have more than one plan. The 403(b) plan typically will accept salary deferrals and the 401(a) or 401(k) plan will accept employer non-elective contributions and/or matching contributions. Warning: Non-governmental 403(b) plan are subject to ERISA Employers can promote a two-plan approach with employees. 24

25 Maintain multiple plans Is it advantageous to maintain a 403(b) and a 457(b) plan? Allows an employer to double up contributions for some groups 402(g) elective deferral limit applies to 403(b) plan only 457(b) contribution limit applies to 457(b) plan only Additional considerations 457(b) plan has an additional catch-up contribution feature that allows certain employees to double their contributions in 3 years prior to normal retirement age 403(b) plan has an additional 15 years of service catch-up contribution feature that allows certain employees to potentially contribute an additional $15,000 25

26 Industry trends Automated features Automatic enrollment Automatic Contribution Arrangement (ACA) Eligible Automatic Contribution Arrangement (EACA) Qualified Automatic Contribution Arrangement (QACA) Automatic increase Plan level Participant level Qualified Default Investment Alternative (QDIA) 26

27 Industry trends (cont d) Roth contributions Optional provision to add to the plan Availability for hardships and loans True-up match contributions A way to ensure that employees receive the full match for the year Uniform employer contribution structure Potential problems/concerns with non-uniform structure 27

28 Industry trends (cont d) Special 15-year catch-up provision Use/availability Age 50 catch-up provision Loan program/policy Availability Terms 28

29 Employee Plans Compliance Resolution System (EPCRS) Rev. Proc Overview Impact on 403(b) plans Types of errors Plan operation Demographic Document Significant vs. Insignificant EPCRS programs Self-correction Voluntary correction Audit cap 29

30 Common errors in 403(b) plans Eligibility/universal availability Currently available Effectively available Exclusion of certain employees Part-time employees Other exclusions Compensation Use of 414(s) safe harbor definition Modifications and exclusions Loans and hardships 30

31 Common errors in 403(b) plans Proactive & preventative measures Plan document review Determine if the plan document and operation match Review participant communication & forms Enrollment materials Annual notices Summary Plan Description Distribution forms Review administrative processes and procedures Loan policy Hardship approval process 31

32 Thank you! Questions? 32 Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations.