403(b) Plans. William C. Grossman, ERPA, APA, QPA, GFS, McKay Hochman Consulting, A DST Systems Inc. Company

Transcription

1 403(b) Plans William C. Grossman, ERPA, APA, QPA, GFS, McKay Hochman Consulting, A DST Systems Inc. Company 1

2 William C. Grossman, ERPA, APA, QPA, GFS, McKay Hochman Consulting, A DST Systems Inc. Company William Grossman has been with McKay Hochman Co., Inc. for over 14 years and has had various positions there including Director of Education and Communication and Senior Consultant. Bill is the mhco.com and Alert editor. Bill is the primary author of most of the mhco website articles and the firm s three newsletters. Bill is an ERPA. Bill was Director of 401(k) Training for a major record keeper, and has over 20 years experience running a bank s 1 billion small retirement plan and IRA business. Bill has a BA from New Jersey City University, an MBA from Fairleigh Dickinson University and is a graduate of the NY AIB where he served as an instructor for 17 years. Bill was NIPA s Volunteer of the year in

3 AGENDA What is a 403(b), a historical perspective Which entities are eligible to sponsor a 403(b) plan; The differences between an ERISA and Non-ERISA 403(b) plan; A comparison of 401(k) and 403(b) plans; and How to leverage the 403(b) rules into optimal plan design 3

4 What Is a 403(b)? A Historical Overview 4

5 Historically 403(b)(1) arrangements started in 1958 for employees in certain tax-exempts to save for retirement. Limited to annuity contracts issued by insurance companies individual contracts or group contracts. 403(b)(7) added in 1974 permitting investment in mutual funds (registered investment companies) in custodial accounts. 5

6 Historically 403(b) arrangements pre-date ERISA Year Legislation/Regulation 1958 Section 403(b) written by Congress 1964 Original regulations 1974 ERISA and Custodial Accounts (b) Rollover to IRA (a)(4), (a)(9); 410(b) 1990 Revenue Ruling creating transfers 2004 Proposed 403(b) Regulations 2007 Final Regulations Issued 2009 Final Regulations Operational 6

7 Historically - Prior to 2007 final regulations Non-ERISA 403(b)s: worked somewhat like an IRA with salary reduction contributions Often sold directly to the employees of a school by an annuity vendor and then controlled by the employee. So employee controlled the 403(b), like individual controls an IRA once the SEP contribution is made Were able to be moved by employee from vendor to vendor by a RR transfer, like the control an IRA owner has ERISA 403(b) arrangements 403(b) with employer contribution or employer involved with discretionary decisions, i.e. hardships, loans, etc. 7

8 What is a 403(b) Plan? Pub 571: A 403(b) plan, aka a tax-sheltered annuity, is a retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Treas. Reg (b)-2(b)(16)(ii): Section 403(b) Plan means the plan of the employer under which the section 403(b) contracts are maintained. Individual accounts in a 403(b) can be any of the following: An annuity contract provided through an insurance contract, A custodial account invested in mutual funds, A retirement income account set up for church employees and generally invested in either annuities or mutual funds 8

9 Employer Eligibility for a 403(b) Not all employers are eligible to sponsor a tax sheltered annuity 9

10 Eligible Employers Code 501(c)(3) Tax-Exempt Organizations Public Schools Churches Deemed Code 501(c)(3) Entities 10

11 Code 501(c)(3) Tax Exempt Organizations The employer must be organized and operated exclusively for at least one of the following purposes: Religious Charitable Scientific Public Safety Testing Animal or Child Abuse Prevention Literary Education Promotion of Amateur Sports (not the sports facility) 11 11

12 Code 501(c)(3) Tax Exempt Organizations May Not Profit an individual A 501(c)(3) organization may not have its income or profit accrue to the benefit of any individual, Influence legislation A 501(c)(3) organization may not influence legislation by propaganda or other means as a substantial part of its activities (except for certain lobbying activities), 12

13 Code 501(c)(3) Tax Exempt Organizations May Not Be a Government Instrumentality in enforcement or regulation Generally, state and municipal governments are not eligible employers. But, if the organization is a separate entity that is not engaged in regulative or enforcement functions and is operated pursuant to the guidelines for 501(c)(3) organizations, it may be an eligible employer. When in doubt IRS Form 1023 Form 1023 is the Application for Recognition of Exemption under Section 501(c)(3) Fee for filing Form 1023 increasing in 2010: 13

14 Form 1023-EZ Streamline 501(c)(3) Determination Started in 2014 Form 1023-EZ is the streamlined version of Form 1023, Application for Recognition of Exemption Under IRC Section 501(c)(3). Eligibility Worksheet on page 11 of instructions. If you answer yes to any of the questions you are not eligible to use the streamlined form. Example questions on next slide 14

15 Form 1023-EZ Streamline 501(c)(3) Determination Example Questions Q1. Do you project that your gross annual receipts will exceed $50,000 in any of the next 3 years? Check either: Yes No Q3 Do you have total assets in excess of $250,000? Check either: Yes No There are 26 questions 15

16 Eligible Employers Public Schools Primary Secondary Preparatory High School College or University Indian tribal government schools Church Plans Churches Qualified church-controlled organizations (QCCOs) Church-related organizations Ministers 16

17 Eligible Employers Public Schools: Criteria to Be Met Primary function presentation of formal instruction; Organization must maintain a regular faculty and curriculum; Organization must maintain an enrolled student body; May not engage in educational and non-educational, unless non-educational functions are merely incidental to the educational function 17

18 Deemed 501(c)(3) Entities The following organizations have received explicit or implicit approval from the IRS to sponsor 403(b) arrangements: Cooperative Hospital Services Organization These 501(e) organizations perform certain functions on behalf of 501(c)(3) organizations Foundations Non-profit foundations under 509(a) and private foundations under 4942(j)(3) are eligible. They must satisfy 501(c)(3) before they can satisfy 509(a) or 4942(j)(3). 18

19 Deemed 501(c)(3) Entities - Continued The following organizations have received explicit or implicit approval from the IRS to sponsor 403(b) arrangements: Uniformed Services University of Health P.L gave permission to this organization to have a 403(b) for civilian staff and faculty. Other Organizations which meet the same goals Organizations under 170(c)(2), i.e. community chests, funds or foundations which meet the same goals and objectives as required for 501(c)(3) organizations may be eligible. Again, when in doubt IRS Form 1023 or, if applicable, Form 1023-EZ 19

20 Ineligible Employers Private Hospitals Private Health Care Agencies Private Schools, that are not 501(c)(3) entities Private Research Facilities Civic leagues Labor organizations Agriculture or gardening groups Business leagues Chambers of commerce Credit unions Others 20

21 Typical Ineligible Employers at IRS Audit Ineligible employers list: Organization who do not meet the requirements and goals of 501(c)(3), Sometimes a for-profit subsidiary of a 403(b) 21 21

22 EPCRS Correction for Ineligible Employers Who Have a 403(b) Arrangement VCP Filing required EPCRS (RP ), Appendix C, Part II, Schedule 6, Correction (Renamed Form F by Rev. Proc ): 1. All contributions under the plan ceased as of date. 2. No new contributions permitted in the future. 3. The assets in the plan will remain in the contract until participant has a distributable event 22

23 Eligible Employers Recap Public schools Local school districts Colleges Universities Certain tax-exempt organizations, such as 501(c)(3) entities Public charities Other organizations exempt under Section 501(c)(3) of the Internal Revenue Code. E.g. Churches, QCCOs Deemed Section 501(c)(3) Organizations 23

24 ERISA v. NON-ERISA Agenda What Happens If a 403(b) Is Subject to ERISA Non-ERISA 403(b) Plans When a 403(b) Plan Is Subject to ERISA DOL Regulation (f) DOL FAB DOL FAB DOL Advisory Opinion A 24

25 What Happens If 403(b) Is Subject to ERISA? 25

26 Effect of ERISA If Non-ERISA Becomes Subject to ERISA If Non-ERISA Plan Becomes Subject to ERISA, then These Rules Apply Eligibility and Participation Vesting Spousal Rights: Beneficiary, QJSA, etc. ERISA Fiduciary Standards/Liability ERISA Bonding Requirements Prohibited Transaction Protection from Creditors If Non-ERISA Plan Becomes Subject to ERISA, then These Rules Apply Disclosure Requirements: SPS, SMM, SAR Benefit Statements 404(a)(5); 408(b)(2) QDIA, Blackout Notice, etc. Form 5500 Reporting Large Plan Audit Penalties for Non-Compliance with ERISA Requirements, such as, Not Having Provided Disclosures 26

27 Can a 403(b) Plan Unintentionally Become an ERISA Plan? Yes. Extent of the employer s involvement is key. If plan is subject to ERISA plan notes and not operated as an ERISA plan; there is liability, e.g.: QJSA, spousal consent not obtained Fiduciary rules, Fiduciary Breach Disclosures not provided, SPD, SMM, Statements Penalties for not filing Form

28 DFVCP Late Filer Penalty for a 501(c)(3) Q10: Is there a different per-plan penalty cap that applies to administrators of small plans sponsored by Internal Revenue Code (Code) section 501(c)(3) organizations (including Code section 403(b) small plans)? Yes. In the case of a small plan sponsored by a Code section 501(c)(3) organization (including a Code section 403(b) small plan required to file an annual report), the applicable penalty amount is $10 per day for each day the annual report is filed after the date on which the annual report was due (without regard to any extensions), not to exceed $750 regardless of the number of delinquent annual reports for the plan submitted as part of the same DFVCP submission. 28

29 DFVCP Late Filer Penalty for a 501(c)(3) This per-plan penalty cap, however, will not be available if, as of the date the plan files under the DFVCP, there is a delinquent or late annual report due for a plan year during which the plan was a large plan, in which case the large plan cap will apply. If you are using the online penalty calculator or choose to submit to the program electronically, you must answer Yes on the calculator to the question Are you a 501(c)(3) organization? If you are paying by mail you must include the notation 501(c)(3) Organization in the upper-right corner of the first page of the paper print out of the electronically filed Form 5500 or Form 5500-SF that must be mailed to the DFVCP, along with the penalty check. 29

30 ERISA v. Non-ERISA 403(b) DOL Reg (f): Safe Harbor from ERISA, and FAB , FAB , Advisory Opinion A 30

31 Comparison of 403(b) and 401(k) ERISA Requirements 403(b) Exempt from ERISA: Churches unless they elect to be covered by ERISA Government plans Other 501(c)(3) tax exempt entities are subject to Title 1 of ERISA unless certain conditions are met 401(k) All 401(k) plans subject to ERISA Exceptions Churches; unless they elect to be covered by ERISA Governmental plans opened prior to May 6,

32 Does ERISA Apply to 403(b) Plans? ERISA Section 3.2A Definitions the terms employee pension benefit plan and pension plan mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program (i)provides retirement income to employees, or (ii)results in a deferral of income by employees for periods extending to the termination of covered employment or beyond 32

33 Safe Harbor from Being an ERISA 403(b) Safe harbor rules for a 403(b) plan to be exempt from ERISA are in regulation (f). Generally, 403(b) plan Not exempt if: Employer contributions Employer is making discretionary decisions Employees do not have a reasonable choice of investment 403(b) plan must also satisfy FAB , FAB and Advisory Opinion A 33

34 Non-ERISA Arrangements General Requirements Voluntary Participation Right enforceable solely by the participant or beneficiaries or authorized representative Employer receives either no compensation, or reasonable compensation for arrangement Employer involvement is administrative only NO Employer Contributions NO Mandatory Contributions Where is this found? 34

35 ERISA Regulation (f) Limited Employer Involvement Limited involvement exemption available if All of the following conditions are satisfied: Participation is completely voluntary for employees Employee can enforce contract Employer gets no direct or indirect benefit other than reasonable expenses actually incurred Employer s involvement is limited to: A. Allowing product providers to publicize their products to employees B. Requesting information about the products C. Summarizing or compiling information provided for employees D. Collecting or remitting employee contributions E. Maintaining records, e.g. holding group contracts in employer s name F. Selecting annuity contractors, limiting to a reasonable number selected to offer reasonable choice 35

36 2 CFR (f) (3) (vii) After February 6, 1978, limiting the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances. Relevant circumstances may include, but would not necessarily be limited to, the following types of factors: A The number of employees affected, 29 CFR (f) B C D The number of contractors who have indicated interest in approaching employees, The variety of available products, The terms of the available arrangements, E The administrative burdens and costs to the employer, and F The possible interference with employee performance resulting from direct solicitation by contractors; and (4) The employer receives no direct or indirect consideration or compensation in cash or otherwise other than reasonable compensation to cover expenses properly and actually incurred by such employer in the performance of the employer's duties pursuant to the salary reduction agreements or agreements to forego salary increases described in this paragraph (f) of this section. 36

37 FAB DOL issued FAB simultaneous to the final 403(b) regulations to: Explain that the employer s adoption of a written plan does not automatically subject the 403(b) plan to Title 1 of ERISA, and State what the employer may and may not do, regarding the written plan requirement while remaining within the safe harbor from being an ERISA plan. State that safe harbor from ERISA regulation (f) remains operative Compliance with the final 403(b) regulations will not necessarily cause a 403(b) to become covered by ERISA. 37

38 ERISA Exemption Safe Harbor Clarifications under FAB What employer actions are permitted under FAB and the 403(b) still be in the safe harbor? Establish a written plan Review structure/operation of plan for discrimination, limits and tax issues Correct failures; EPCRS: Rev. Proc , and 28 Transmit information employer knows, i.e. address, service, compensation, doctor s certificate e.g. for hardship purposes Limit funding media or products available to employees, or the annuity providers who may approach employees, provided a reasonable choice available Terminate the 403(b) plan 38 38

39 Employer Activities That Are Permitted Under the Safe Harbor; FAB If individual contracts fail to satisfy tax qualification requirements, even if due to actions/errors of an employee or annuity contractor, then employer can be liable to the IRS for: potentially substantial penalty taxes, correction fees, and employment taxes on salary deferrals Under FAB , Employer may: Fashion and propose corrections, use EPCRS Develop improvements that will prevent tax defects Obtain cooperation of outside entities involved in the program needed to correct defects, and Keep records of its activities 39

40 Employer MAY NOT Perform the Following and Be Within the Safe Harbor; FAB Employer may NOT be responsible for, or make discretionary determinations in, administering the program. For example: Authorizing plan-to-plan transfers Processing distributions Satisfying the QJSA requirements Determining a hardship Determine eligibility for, or enforcement of, loans QDRO determinations Automatic Enrollment 40

41 OUTSIDE the Safe Harbor, FAB The Employer May NOT: Negotiate with annuity providers or account custodians to change the terms of their products for purposes such as setting the conditions for hardship withdrawals 41

42 Recap of Actions That Will Take the Employer Outside of the Safe Harbor What actions will take the employer outside of the safe harbor? Employer contributions Mandatory contributions Limiting Reasonable Choice Authorizing transfers Processing distributions Determining the eligibility for: Hardship distribution Participant Loan QDRO Automatic Enrollment 42 42

43 Field Assistance Bulletin Non-ERISA Clarifications Does ER Choosing Only One Vendor Satisfy the Reasonable Choice criteria in the safe harbor? 43

44 FAB ERISA Exemption from Safe Harbor Under FAB , the Employer may: Limit providers to those who assume responsibility for discretionary decisions Include optional features such as participant loans in 403(b) plan, but only if handled by the investment provider. Refuse to include contracts if they are either too costly, or if they would involve ER in discretionary decision making Discontinue the use of a vendor who is not complying with Section 403(b)/final 403(b) Regulations and still be a non- ERISA plan 44

45 FAB ERISA Exemption from Safe Harbor The Employer may NOT: Unilaterally move from one provider to another. If an employer does this, the plan will be an ERISA 403(b) Hire a TPA to make discretionary decisions without losing the ERISA exemption and thus the non-erisa plan will be subject to ERISA. However, the employer may assign discretionary determinations to the annuity provider, who may in turn hire a TPA without the plan losing safe harbor status. 45

46 Is a 403(b) Plan That Limits the Number of Investments Subject to ERISA? Possibly. Employer may limit number of investments choices available to employees, provided it does not preclude a reasonable choice of products and funding companies. If employer limits funding access to the extent that its employees do not have a reasonable choice of investment alternatives, the plan is an ERISA plan. 46

47 Safe Harbor DOL Regulations Regarding Reasonable Choice Employer may limit: the funding media or products available to employees, or the annuity contractors who may approach employees, to a number and selection which is designed to afford employees a reasonable choice in light of all relevant circumstances. 47

48 FAB ERISA Exemption 1 Vendor? To be a safe harbor arrangement under 29 CFR (f) must a participants reasonable choice include more than one 403(b) investment vendor? YES! But there are two exceptions when one vendor may be ok. 48

49 FAB ERISA Exemption 1 Vendor? Exception One ER may have one investment vendor to whom it will forward payroll salary reduction contributions provided participants are permitted to transfer or exchange their interest to the 403(b) account of another provider. Note: Employees must be provided a disclosure of any limitations and costs associated with such transfers/exchanges before deciding to participate. This is required in both this exception and the alternative on the next slide. 49

50 FAB ERISA Exemption 1 Vendor? Alternative, Exception Two If cost of sending payroll deductions to multiple 403(b) vendors causes a small ER to stop making its payroll system available to all vendors, then ER may limit payroll to one ER must be able to demonstrate these administrative burdens and costs to the DOL. This exception is only available if the one vendor selected is offering a wide variety of investment products such as a single insurance company with access to a broad range of affiliated investment products or a single 403(b) compliant open architecture custodial account providing employees access to a broad range of unaffiliated mutual fund products 50

51 Advisory Opinion A 51

52 Advisory Opinion A Employer maintains a non-erisa 403(b) deferral only plan Employer also maintains a 401(k) plan which provides matching contribution on the deferrals in the 403(b) plan Non-ERISA exemption would no longer be satisfied due to the match provided on the 403(b) deferral in the 401(k) Question awaiting guidance is can the same employer maintain a non-erisa 403(b) and an ERISA 403(b) and maintain the 403(b)s non-erisa status? 52

53 Overview of Differences Between 403(b) and 401(k) Differences Between 403(b) and 401(k) No top heavy testing Plan terminations Investment differences Distribution restrictions Transfers and exchanges Eligible Entities Information Sharing Agreements 403(b) No Trust Differences Between 403(b) and 401(k) No ADP testing Universal Availability Rules Special catch-up Special Post-severance rules 415 Rules ERISA v. Non-ERISA Non-ERISA = No QJSA Rules 53

54 Comparison of 403(b) and 401(k) Eligible Employers 403(b) 501(c)(3) entities Public school systems Public colleges and universities Churches organizations Deemed 501(c)(3) entities 401(k) For-profit entities; i.e. C Corp., S-Corp., Sole Proprietor, Partnership, Tax-exempt employers, etc. Private schools, colleges, universities Churches organizations Gov t Plans established prior to May 6,

55 Comparison of 403(b) and 401(k) Eligibility to Participate: DEFERRALS 403(b) Deferrals: Immediate Eligibility Universal Availability (UA) UA Exclusions NRA w/no US Income If eligible to participate in another 403(b), a 401(k), or govt. 457(b) Work study students Work Less than 20 hrs. Less than $200 (Church plans, by definition, are exempt from universal availability rules.) 401(k) Deferrals: Maximum: age 21/1 year of service Exclusions NRA w/no US income Collectively bargained Classification exclusions, provided coverage is passed. 55

56 Comparison of 403(b) and 401(k) Eligibility to Participate: ER Contributions 403(b) ER Matching/NEC Maximum generally, age 21 1 year of service (can be up to 2 years) Classification exclusions, provided coverage is passed. 401(k) ER Matching/NEC Maximum generally age 21 1 year of service (can be up to 2 years) Classification exclusions, provided coverage is passed. 56

57 Comparison of 403(b) and 401(k) Vehicle for Plan Assets 403(b) Annuity contracts Custodial Accounts Retirement Investment Account for a Church 401(k) Annuity contracts Custodial Accounts Trust Variety of Investment Vehicles as Permitted by the Plan Document Stocks, bonds, employer securities, life insurance, real property, certain gold and silver coins issued by US or state governments, 57

58 Comparison of 403(b) and 401(k) Required Disclosures ERISA 403(b) Generally, same as a 401(k). i.e. SPD, SAR, Form 5500, Statements, etc. 401(k) SPD, SAR, Form 5500, Statements, etc. NON-ERISA 403(b) None 58

59 Comparison of 403(b) and 401(k) Special Contributions 403(b) 1. Designated Roth 2. Age 50 Catch-up: 414(v) ($6,000 for 2015) 3. Special Catch-up: 402(g)(7) A. Requires 15 years of service with qualified organization; B. Up to $3,000/year based on outcome of formula up to a lifetime maximum of $15, (k) 1. Designated Roth 2. Age 50 Catch-up: 414(v) ($6,000 for 2015) 59

60 Includible Compensation Year of Service 403(b) Year of service: Full year (employer s work period, full time = 1 year of service) Add together fractional year of service. Example: Individual working 50% for two years and earning $30,000 per year has $60,000 in includible comp. This example s YOS actually spans 2 years See Pub 571 for example 401(k) Year of service: Generally 12 months, i.e. plan year 60

61 Comparison of 403(b) and 401(k) Distributions (Other Than Deferrals) 403(b) ER Contributions CUSTODIAL ACCOUNT: Severance Disability [72(m)(7)] Death Age 59½ 401(a)(9) 403(b) ER Contributions ANNUITY CONTRACT: Severance Prior event such as fixed period of time or stated age, or Disability [72(m)(7)] 401(a)(9) 401(k) ER Contributions distributed upon: Severance Hardship In-service Disability As Defined in plan Death Age 59½ 401(a)(9) 61 61

62 Comparison of 403(b) and 401(k) Plan Termination 403(b) Distributable Event (final 403(b) Regs) All assets to be distributed ASAP, within 12 months Rev. Ruling Distribution of a fully paid individual insurance annuity contract as a 403(b) Employer does not control assets and may have issues trying to distribute or auto roll custodial account. 401(k) Distributable Event All assets to be distributed ASAP, within 12 months Employer may automatically roll to IRA missing participant funds. 62

63 Comparison of 403(b) and 401(k) Successor Plan Rules 403(b) Successor plan rules prevent contributions to a 403(b) for 12 months. However a 401(k) plan may be started. 2% exception 403(b) plan may not be merged into 401(k) 403(b) may be started after a 401(k) is terminated 401(k) Successor plan rules prevent contributions to a 401(k) for 12 months. However a 403(b) plan may be started. 2% exception 401(k) plan may not be merged into 403(b) 401(k) may be started after a 403(b) is terminated 63

64 403(b) Plan Design Basics An Overview 64 64

65 403(b) Plan Design Basics Choice of Plans Employer s decision to offer a 403(b) may be based on being eligible for other plans. Such as: A 401(k) A 457(b) A DB A cash balance plan Non-ERISA Status No HCEs in company, so neither a new comparability feature nor permitted disparity are needed. 65

66 403(b) Plan Design Basics Employer s Objectives Deferrals only plan Employee tax savings; retirement savings Employer DC contributions ER tax deduction; EE retirement benefit 501(c)(3) ERISA 403(b) status Employer DB contributions In addition to 403(b) or in lieu of DB 66

67 403(b) Plan Design Basics Plans Available Per Entity Nongovernmental tax-exempt 501(c)(3) may have: 401(a), 401(k), 403(b), 457(b), SEP, SIMPLE IRA, SIMPLE 401(k) Governmental employer may have 401(a), 457(b); [pre (k)], SEP, SIMPLE IRA Public school may have 403(b), 457(b) Church may have 401(a), 401(k), 403(b)(9), Nonqualified Deferred Comp. Plan, SEP, SIMPLE IRA, SIMPLE 401(k) 67

68 Combining Plan Types 403(b) and 401(a) Plans Deferrals to 403(b), no ADP testing And/or Add governmental 457(b) to double deferral limit And/or Add a 401(a) plan Issues in adding: Administrative complexity; Two 5500s Whether testing becomes necessary; e.g. nondiscrimination, 415, etc. 68

69 Combining Plan Types 403(b) and 401(k) or 401(a) Plans A Sample Plan Design Strategy HCEs only defer to 403(b) NHCEs only defer into 401(k) 401(k) passes ADP 69

70 457(b) Plans Eligible 457 plans under 457(b) Eligible Employers for 457(b): 501(c)(3) and governmental Eligible Plans similar to 403(b) and 401(k) Design for a select group of management and HCEs. 70

71 457(b) Plans Contribution limit for a 457(b) is set under Section 457(e) The limit for all contributions for year is $18,000 in 2016, plus catch-up Total of EE and/or ER Contributions, (Deferrals, matching, nonelective). Not subject to 402(g) limit Reference for annual limit amount, plus catch-up 71

72 457(b) Plans Governmental organizations Municipalities, states, public schools Not-for-profit 457(b) Eligible Plans Able to offer to a select group of HCEs or management employees. Opportunity for select employees to double deferrals and contributions. This is just an introduction to 457(b) and not a course on the subject 72

73 Overview of 403(b) Guidance 73

74 403(b) Code Sections Code Section 403(b)(1) 403(b)(3) 403(b)(4) 403(b)(5) 403(b)(7) 403(b)(8) 403(b)(9) 403(b)(10) 403(b)(11) 403(b)(12) 403(b)(13) 403(b)2) & (6) Covering General Rules, Annuities Includible Compensation Years of Service Application to More than One Annuity Custodial Accounts for Regulated Investment Company Stock Rollover Amounts Retirement Income Accounts Provided by Churches, etc. Distribution Requirements Requirement that Distributions Not Start Before Age 59½ Nondiscrimination Requirements Trustee-to-trustee Transfers to Buy Permissive Service Credits Repealed 74

75 Final 403(b) Regulations of July 26, 2007 Effective Jan. 1, 2009 Regula tion 1.403(b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (b) (c)-5 Covering General Overview of Taxability Under an Annuity Contract Purchased by a section 501(c)(3) Organization or a Public School Definitions Exclusion for Contributions to Purchase Section 403(b) Contracts Contribution Limitations Nondiscrimination Rules Timing of Distributions and Benefits Taxation of Distributions and Benefits Funding Special Rules for Church Plans Miscellaneous Provisions Applicable Dates Certain Tax Exempt Organizations 75

76 Guidance Date Topic Final 403(b) Regulations July 26, 2007 First Regulations in 40 years FAB July 24, 2007 Written Plan and Non-ERISA Rules Rev. Proc Nov. 27, 2007 Model School Plan, What Accounts in a Plan Recent Guidance IRS Notice Dec. 11, 2008 Extension to Deadline to Adopt Written Plan to Dec. 31, 2009 IRS Announcement Apr.14, 2008 Draft Rev. Proc. FAB July 20, 2009 Form 5500 Guidance IRS Announcement Dec. 29, 2009 RAP, Intention for Rev. Proc. FAB Feb. 17, 2010 Clarifications: 5500; ERISA SBJCA, Notice Sept. 27; Nov. 26, 2010 In-Plan Roth Rollover Rev. Rul Feb. 22, (b) Plan Termination Advisory Opinion A May 5, (k) Match on 403(b) Deferrals = ERISA Plan 76

77 Guidance Date Topic Rev. Proc Dec. 31, 2012 EPCRS: 403(b) nonamender rules Recent Guidance ATRA, Notice Jan. 2; Dec. 11, 2013 In-plan Roth Rollover otherwise nondistributable amounts Rev. Proc Mar. 28, 2013 Established Pre- Approved Program Rev. Proc Mar. 25, 2014 Pre-approved Plan Submission Extended to Apr. 30, 2015 Rev. Proc Feb. 26, 2015 Revised Fees and Address for Preapproved Plan Submissions Revised 403(b) LRMs Mar. 29, 2015 Revisions to 403(b) LRMs 77

78 78

79 Questions and Comments Thank you for attending Questions and Comments Time 79

80 FOLLOWING SLIDES ARE FOR REFERENCE 403(b) Plan Design and the 415 Annual Additions Limit 80

81 415 Limit Issue 1. Aggregation of all 403(b) plans of the same employer for the annual additions limit ($53,000 in 2016). Including related employers limit applies separately to each unrelated employer s 403(b) limit is generally applied as if the employee, and not the employer, maintains the plan. 4. Generally, the 403(b) plan is not aggregated with the qualified plan for 415 purposes. 81

82 415 Limit Issue Example 1 Tax-exempt hospital has 403(b) plan and a qualified plan, i.e. a profit sharing plan. Doctor A defers $18,000 to hospital 403(b). Hospital provides match of $6,000. Hospital allocates $44,000 in profit sharing plan for Doctor A. Total of $68,000 for Doctor A. 415 not violated, because: $24,000 in 403(b) treated as Doctor A s own plan. $44,000 in profit sharing plan treated as hospital s plan. 82

83 415 Limitation Issues Special aggregation rule requires 403(b) plan to be aggregated with qualified plans for annual additions limit IF: Participant controls an employer 403(b) plan aggregated with all DC plans that participant maintains as the one in control of employer Treated as if the controlled employer also maintains the 403(b) plan. Control defined as owning more than 50% ownership in the other business. 83

84 415 Limit Issue Example 2 Dr. B works for a tax-exempt hospital and has controlling ownership. Hospital: 403(b) plan & profit sharing plan. Due to controlling interest, the 403(b) and qualified plan are combined for 415 annual additions. NOTE: The aggregation is only with respect to the annual additions for Dr. B s benefits under the 403(b) plan and the profit sharing plan. As other employees have no control, they are not subject to aggregating 403(b) and profit sharing annual additions. 84

85 Occurrence of Excess Annual Additions in a 403(b), Example 3 Dr. Who works for hospital with a 403(b) plan. Dr. Who owns 100% of Corporation A, with a profit sharing plan. Hospital has a great year and contributes $25,000 for Dr. Who to 403(b) plan. Corporation A contributes $40,000 to the profit sharing plan for Dr. Who. Since Dr. Who controls A, the Dr. Who s 403(b) plan and profit sharing plan contribution amounts are aggregated for 415 limit purposes. 85

86 Occurrence of Excess Annual Additions in a 403(b), Example 3 Dr. Who s aggregate annual addition is $65,000. $12,000 Excess Annual Addition ($65,000-$53,000) $12,000 of the $25,000 contributed to 403(b) plan is considered a disqualified contribution. Currently includible in Dr. Who s gross income. 403(b) compliance requires a separate account to be maintained for the disqualified contributions (a)-1(b)(2) and 1.403(b)-3(b). Similar example in 1.415(g)-1(b)(3)(iv)(C)(2) 86

87 Correction of Excess Annual Additions in a 403(b) If the 415(c) annual additions limit is exceeded, the amount in excess is treated as a 403(c) contract, (rather than a 403(b)). The remaining portion of the contract continues to be subject to IRC 403(b), IF: 1. Separate accounts are maintained for 403(b) and 403(c) portions of the contract for the year of the excess and each year thereafter. 2. Failure to separately account for the excess annual additions can result in the immediate taxation of the affected participant's entire 403(b) contract (a)-1(b)(2) and 1.403(b)-3(b)(2) 87

88 Tax-exempt Controlled Group Rules and Plan Design 88

89 Controlled Group Rules Two (or more) tax-exempt entities are treated as a single employer if 80% of directors or trustees of one organization are: Representatives of or Directly or indirectly controlled by the other organization Power to remove & designate another Generally, doesn t apply to governments and certain churches 89

90 Controlled Group Rules A trustee or director is treated as a representative of another exempt organization: if he or she is a trustee, director, agent or employee of the other exempt organization. A trustee or director is controlled by another organization: if the other organization has the general power to remove them and designate new ones. Watch out for coverage (universal availability) and nondiscrimination testing. 90

91 Controlled Group Rules Permissive Aggregation Single plan covers employees of each Org. Regularly coordinate day-to-day activities Organizations share a common purpose Overall anti-abuse provision 91

92 Controlled Group Rules Example 1.414(c)-5 Exempt organization A has the power to appoint at least 80% of trustees of exempt organization B. Organization B is the owner of all the outstanding shares of corporation C, which is not an exempt organization. Organization A has the power to control at least 80% of directors of exempt organization D. Then A,B,C and D are the same employer for the purposes of any plan maintained by A, B, C and D. 92

93 Coverage Rules and 403(b) Plan Design 93

94 Coverage Rules and Plan Design Contributions to a 403(b) plan have to be disregarded when determining whether coverage is passed under qualified plan. Strangely, a 403(b) plan may use a qualified plan s contributions to pass coverage*. * 1.410(b)-7(f) 94

95 Coverage and Plan Design Givens: Coverage rules permit 401(k) plan to exclude HCEs. Universal availability rules permit employees eligible to defer in a 401(k) to be excluded from 403(b). 95

96 Coverage and Plan Design Single ER Plan Design Concept: 401(k) set up with HCEs excluded. ADP test passes due to no HCEs. 403(b) set up with NHCEs excluded. No ADP test in 403(b). HCEs can maximize deferrals. RESULT: 401(k) for NHCE, 403(b) for HCEs NOTE: This does not work for matching as the excludable employee rules under 1.403(b)(12)(A)(i) are different. 96

97 Coverage Rules and Plan Design; Coverage Exemption for 501(c)(3) 97

98 Coverage Change from EGTRRA Background Suppose a tax-exempt entity has a 403(b) and a related employer that is not tax-exempt, has a 401(k) Because it is not eligible to have a 403(b). Company with 401(k) must pass coverage for the 401(k). If company with 401(k) cannot pass coverage, it cannot be aggregated with the 403(b) in order to pass coverage. Treasury Regulation Section 1.410(b)-6(g)(Issued July 21, 2006) permit the employees of the company with 403(b) to be excluded from 401(k) coverage test. 98

99 Coverage Change Background To Qualify under the regs.* for the Treatment as excludable Employees, two conditions must be satisfied: 1. No employee of any 501(c)(3) is eligible to participate in the 401(k) or 401(m) plan. AND 2. At least 95% of the employees, who are neither: employees of a tax-exempt 501(c)(3), nor employees of a governmental entity who are precluded from eligibility for a 401(k) plan, are eligible to participate in 401(k) or 401(m) plan. * Treas. Reg (b)-6(g), Issued July 21,

100 Coverage Example 1 Controlled group consists of: a 501(c)(3) hospital and a 100% owned for-profit pharmacy Hospital has a 403(b) Pharmacy: has a 401(k) plan for all its EEs. Pharmacy's 401(k) plan may exclude the hospital employees because: 98% of the pharmacy s nonexcludable employees are eligible for the 401(k) Pharmacy s 401(k) may exclude all the hospital s employees when running the 401(k) coverage test as the rules of the regulation are satisfied 100

101 Coverage Example 1 Continued Further, if pharmacy s 401(k) plan also has a matching contribution formula. Hospital s employees may be treated as excludable employees when testing whether that 401(m) plan passes coverage: provided at least 95% of the pharmacy's employees are eligible for the 401(m) plan. 101

102 Coverage Change from EGTRRA Variation on Theme Controlled group with two or more tax-exempt entities and a for-profit entity If all tax-exempt entities are excluded from the 401(k), the 95% coverage exception rule applies If any tax-exempt is permitted in 401(k), the 95% coverage exception rule is not applicable Example on next slide 102

103 Coverage Example 2 Parent company and three subsidiaries Parent, and subsidiary A and B are tax-exempt entities; Subsidiary C is a for-profit entity Parent company's employees in 403(b) Employees of A, B, and C in 401(k) plan 103

104 Coverage Example 2 Under the regulations, if the 401(k) plan covers any of the employees of a tax-exempt company the 401(k) plan may NOT treat the parent company employees who are eligible for the 403(b) plan as excludable employees, even if at least 95% of the nonexcludable employees working for C are covered by the 401(k) plan. 104

105 Coverage: Special Rule & Matching Example 3 Parent company A; 2 subsidiaries, S and T A is a 501(c)(3) tax-exempt organization with a 403(b) plan -- With only deferrals. S and T have a 401(k) and at least 95% of employees of S and T are eligible. There is also a match. Employees of A are eligible for matching formula under plan of S and T, based on deferrals A s employees made to the 403(b) plan*. For the 401(k) plan, the coverage exception is applicable, because no employees of A are eligible for the 401(k) plan. * Note: A s 403(b) plan would be an ERISA plan due to the matching made in the 401(k) on the deferrals in the 403(b). Advisory Opinion A 105