Workshop 47: Revenue Streams from the Non-Profit Space. Susan D. Diehl, QKA, CPC, ERPA President, PenServ Plan Services, Inc.

Transcription

1 Workshop 47: Revenue Streams from the Non-Profit Space Susan D. Diehl, QKA, CPC, ERPA President, PenServ Plan Services, Inc.

2 Agenda for Today Market Opportunities in the Nonprofit Space Discovering New Clients Differences in Servicing Nonprofits vs. Profit Employers Compliance Nuances Plan Design Considerations ERISA vs. NonERISA

3 Market Opportunities in the Nonprofit Space Now is the Time for Clean-up! Ist Time RAP and new Plan Documents

4 Market Opportunities in the Nonprofit Space Many 403(b) Employers are now after decades shopping around! They need a Plan; Advisor; and TPA! Someone knowledgeable to walk them through the changes!

5 Market Opportunities in the Nonprofit Space Growth in 403(b) plans since B in 2010 and 1.1 T in 2016 in assets Many nonprofit employers that have 401(k) Plans are realizing the need to terminate and adopt a 403(b) Plan Path Act change permits church plans to do just that!

6 Discovering New Clients Think of the types of Employers that are eligible for 403 Plans and you can easily develop your list of prospects! Hospitals, Medical centers, State Universities, Private Colleges and Universities; Church organizations and faith based universities and any other 501c3 organization! You all know these employers in your area! Start there!

7 Differences in Servicing Nonprofits vs. Profit Employers Access to Multiple providers Individual annuity and custodial agreements prevents movement of plan assets without employee signatures Individual Advisors work with participants instead of employer Annuity and Mutual Funds only except for 403b9 church plans

8 Differences in Servicing Nonprofits vs. Profit Employers Advisors/TPAs that work with 403(b) Plans often offer other products HSAs; HRAs 125 plans (may not include the 403(b) Plan) IRAs 457 plans (457(b) and 457(f))

9 401(k) v. 403(b) Major differences between 403(b) and 401(k) plans are: 1. Universal Availability - Eligibility rule applies to 403(b) elective deferrals whereas the ADP test applies to elective deferrals under a 401(k). Immediate eligibility to defer in 403(b) vs. (1 year eligibility for 401(k)). Limited exclusions to Universal Availability 2. Types of Employers 403(b)s limited to: Public Educational Organizations, 501(c)(3) Organizations and Churches 401(k)s available to: all employers except state/local governments, unless grandfathered.

10 401(k) v. 403(b) Major differences between 403(b) and 401(k) plans are (cont d): 3. Investments 403(b)s (Other than church 403(b)(9) plans) can only be invested in annuities or mutual funds; 401(k)s allows for all types unless a prohibited transaction. 4. ERISA v. Non-ERISA 401(k)s with one employee subject to ERISA 403(b)s Governmental and Churches not subject to ERISA (unless church elects ERISA) 501(c)(3) Entities may be exempt from ERISA if meet certain requirements

11 401(k) v. 403(b) Major differences between 403(b) and 401(k) plans are (cont d): 5. Late Deferrals 403(b)s are not subject to 4975 and the excise tax for the plan asset rule. They are also not required to file Form 5330 reporting late deferrals 6. Miscellaneous Top Heavy Rules do not apply to 403bs Multiple Plans are common in the 403b area See Plan design later 401(a) plans and 403b plans are not aggregated for 415 purposes

12 Compliance Nuances Transactions specific to 403(b): Exchanges and Plan to Plan transfers Post-Employment Employer Contributions for the year of termination and up to 5 years thereafter Must stop at death 501c3 ERs nondiscrimination rules apply Universal Availability for Elective Deferrals Financial Hardship Distributions same as 401(k)

13 Compliance Nuances Universal availability All employees must have an effective opportunity to defer. Permitted exclusions: Those who normally work less than 20 hrs/week (based on 1000 hours/year) Those who are nonresident aliens Student providing services (usually work/study program at their school) described in 3121(b)(1) Eligible to participate by salary reduction in other deferral plans sponsored by the employer, i.e. 403(b) 457(b), or 401(k) (457(b) referred to in LRMs as Governmental) Who do not wish or doesn t based on election contribute at least $200 per year to a 403(b) account. Violation of the universal availability rule results in plan failure Correction under EPCRS (similar to ADP correction for 401(k))

14 Compliance Nuances Universal Availability Requires meaningful notice to employees of eligibility to participate at least annually Employees must have reasonable opportunity to make deferral elections IRS will want to see UA notices that are sent to employees and the method by which they are provided Some Employers use multiple avenues to provide these notices Recent audits have required proof and some agents looking for signatures (not required by regulations)!

15 Compliance Nuances Frozen and Terminated Plans (Rev. Rul ) Timely Contribution Remittance/Deposit Catch-up Ordering Rule Information Sharing Agreements Once In/Always In Rule Adjunct Professors/Pro re nata (PRN) employees

16 Compliance Nuances Incorporation of Investment Contracts Plan must incorporate the terms of the investment arrangements by reference. ( vendor attachment part of Administrative Appendix) Plan must provide that its terms govern over any inconsistent terms of the investment contracts. Grandfathered vendors/contracts

17 Compliance Nuances Determining Years of Service for determining includible compensation for: The special 403(b) catch-up rule (the 15 year rule); and Employer contributions for former employees (the 5 year rule).

18 Compliance Nuances Special Church Plan Rules 1. Housing Allowance a. Special Reporting on Form 1099-R b. Box 2a is 0 and taxable amount not determined box is checked c. Rollovers that are coming from a plan that where the participant was not performing ministerial duties must be record kept in a separate rollover source, since these amounts are not eligible to be withdrawn for housing allowance 2. QDRO rules are altered slightly ERISA does not apply to these plans unless elected. Anti-alienation clause does not apply so if state law is silent it is possible that a claim cannot be made by an alternate payee

19 Compliance Nuances Special Church Plan Rules continued 3. Nonelecting Church Plan Special Rules use of pre-1974 rules for a. Coverage, Participation, Vesting and Funding requirements that were in effect on September 1, 2974 b. Exempt from section 4975 prohibited transaction rules c. Mergers and Transfers of plan require 100% immediate vesting (this was prior to the PATH ACT)

20 Compliance Nuances RMDs Bifurcated Account Pre-1987 Balance subject to age 75 distribution for RMD Distributable events Deferrals vs. Employer monies subject to annuity contracts or custodial agreements

21 403(b) allowable distributions But check the Plan

22 Plan Design Considerations Non-Profit Employers (501(c)(3)) May Adopt: 403(b) 457(b) 457(f) 401(a) Profit-Sharing, Money Purchase 401(k) Careful not always advantageous SEP/SIMPLE-IRA (but not with Model 5305-SEP) MEPs

23 Plan Design Considerations Churches 403(b) 401(a) Church 401(a) will be available under the next pre-approved plan revenue procedure 401(k) Careful not always advantageous! SEP (not with Model 5305-SEP) SIMPLE-IRA MEPs Might include: Churches with a steeple; QCCOs or nonqccos. Nonelecting Churches default to pre- ERISA rules. Not subject to ERISA unless they elect, but nonqccos will be subject to testing The PATH Act permits transfers/mergers between 401(a) and 403(b) plans for churches only! This was to take care of inadvertently adopting one plan vs. the other!

24 Structure of Multiple Plans (2017) Now let s look at a few plan designs to maximum benefits. John, age 40 is the CEO of a private school and earns $75,000. He anticipates retiring in 20 years. His contract also requires the Employer to contribute to a 457(f) for John in the amount of $15,000 per year. 403(b) Defers the maximum $18,000* 457(b) Defers the maximum $18,000* 457(f) Employer Contribution $15,000 ESTIMATED TOTAL FOR YEAR 2017 $48,000 * These amounts reduce the annual compensation

25 Structure of Multiple Plans (2017) Jane, age 60 is the CEO of a non-profit and earns $100,000. She is retiring next year (2018) and will be receiving a post-employment amount of $10,000 in Her contract also has required the Employer to contribute to a 457(f) for Jane in the amount of $20,000 per year since (b) Defers the maximum $24, (b) Defers the maximum $24, (f) Employer Contributes $20,000 ESTIMATED TOTAL FOR YEAR $68, (b) Employer Contribution $10,000 (added in 2018)

26 Structure of Multiple Plans (2017) Why are we layering these types of plans? Remember that one plan 403(b) or 401(a) cannot accept more than $54,000 (for 2017). By establishing multiple plans the employees can maximize their contributions and not run afoul of the 415 limitations. 401(a) plans and 403(b) plans are not aggregated when looking at the section 415 cap of $54,000.

27 ERISA vs. NonERISA Keeping the Non-ERISA status of a Nonprofits 403(b) Plan

28 What is an ERISA Plan? An ERISA Plan is generally a retirement plan that benefits employees. Therefore owner-only plans are not subject to ERISA standards. Generally all qualified plans, SEPs and SIMPLE-IRAs that cover common-law employees (other than the spouse) are ERISA Plans 403(b) Plans of tax-exempt entities are ERISA plans but may be considered Non-ERISA if certain conditions are met

29 Non-ERISA 403(b) NEVER SUBJECT TO ERISA GOVERNMENTAL EMPLOYERS, INCLUDING: PUBLIC SCHOOLS STATE COLLEGES/UNIVERSITIES CHURCHES (WITH AND WITHOUT A STEEPLE!) CAN ELECT TO BE COVERED BY ERISA WITHOUT STEEPLE INCLUDES QCCOs AND NON-QCCOs

30 Non-ERISA 403(b) TAX-EXEMPT EMPLOYERS UNDER 501(c)(3) CAN GENERALLY REMAIN NON- ERISA IF: Elective Deferrals Only (No employer contributions) NO employer involvement, except investments and vendor selection Cannot assist in calculating available loans, hardship distributions, etc. Employers push all responsibilities on vendors Cannot approve transactions! Must have reasonable choice of investments, unless choice is offered through open architecture, one vender is generally not acceptable.

31 If Non-ERISA Plan Becomes Subject to ERISA, then These Rules Apply Spousal Rights: Beneficiary, QJSA, etc. Eligibility and Participation ERISA Fiduciary Standards and Liability ERISA Selection and Monitoring ERISA Bonding Requirements Prohibited Transaction Protection from Creditors Protection of Employee Benefits, Rights and Features What Does Being Subject to ERISA Mean? 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

32 How does a 501(c)(3) Maintain Non-ERISA Status? In order for 501(c)(3) Organizations to be considered Non-ERISA, the DOL provided safe harbor criteria listing what employers may and may not engage in as part of the day-to-day administration of the Plan.

33 DOL: Non-ERISA 403(b) Guidance ERISA Regulation (f) Limited Employer Involvement FAB Employer may adopt a written document and other clarifications of what employer may and may not do FAB Employer must have more than one vendor Exceptions to more than one vendor Additional issues of what employer may and may not do May not hire a TPA for approval of transactions. Can be an aggregator. Advisory Opinion A Non-ERISA status lost if 403(b) deferrals receive a 401(m) match in another plan

34 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 ERISA Exemption Safe Harbor Clarifications under FAB What employer actions are permitted under FAB and the 403(b) will remain a Non-ERISA 403(b) safe harbor? Establish a written plan Review operation of plan for discrimination, limits and tax issues Correct failures; EPCRS: Rev. Proc , and 28 Transmit to vendor information employer knows, i.e. address, service, compensation; doctor s certificate e.g. for hardship Terminate the 403(b) plan Limit the funding media or products available to employees, or the annuity providers who may approach employees to a number designed to afford employees a reasonable choice Identify in the plan the parties that are responsible for administrative functions, including those related to tax compliance

36 FAB : Employer MAY NOT Employer may NOT negotiate with annuity/custodian providers to change product terms, i.e. conditions for hardship withdrawals Employer may NOT be responsible for, or make discretionary determinations 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

37 FAB ERISA Exemption from Safe Harbor Under FAB , the Employer MAY: Limit available 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. Could 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

38 FAB ERISA Exemption from Safe Harbor The Employer may NOT: Limit investments to one provider. Permits reasonable choice for cost considerations where for example multiple investments are available under a broker-dealer or an open architecture program.

39 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. 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.

40 How does a 501(c)(3) Maintain nonerisa Status? The Employer may: hold one or more group annuity contracts in the employer s name covering its employees and exercise rights as representative of its employees under the contract, at least with respect to amendments of the contract