agenda workshop #36
TRANSCRIPT
10/17/2016
1
Agenda – Workshop #36
• Different Types of Plans available to Nonprofit Employers
• 403(b) Plans
• ERISA 403(b) or Non-ERISA 403(b) or Keeping the Non-ERISA status of Nonprofit Plan
• Comparison/Contrast ERISA 403(b) to 401(k)
• Comparison/Contrast 457(b) to 457(f)
• Controlled Groups, Other Issues, Plan Designs
10/17/2016
2
Non-Profit Organizations –Plan Options and Opportunities
Speakers:
Bill Grossman
McKay Hochman Consulting, DST Systems Inc.
Sue Diehl
President, PenServ Plan Services, Inc.
What is a Tax-Exempt Organization?
• Section 501(c) of the IRC contains 29 different nonprofit organizations
For example:
• 501(c)(6) includes Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.
• 501(c)(3) includes certain hospitals, educational organizations, etc.
10/17/2016
3
What Types of Plans can they Establish?
• 401(k)
• Profit-sharing/Money Purchase – 401(a)
• 403(b) –Only for 501(c)(3) Organizations
• 457(b)
• 457(f)
• SEPs
• SIMPLE-IRAs
• MEPs – Multiple Employer Plans
501(c)(3) Organizations are Unique!• Only tax-exempt that can establish a 403(b) Plan.
• 501(c)(3) are –“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”
10/17/2016
4
A word about Charter Schools…
• Also unique in that they typically have “dual taxuality”
• They are both a governmental entity and a tax-exempt organization under 501(c)(3)
• State law will determine how they are treated for State law purposes and what plans they may adopt
A word about Charter Schools…
• For Example in Pennsylvania
–Charter Schools are treated as a governmental employer
– Employers are required to either cover them under the State Retirement System or cover them with a comparable 403(b) plan.
10/17/2016
5
A word about Charter Schools…
In Michigan
• if there is a management company that is used the plan is typically set up as a Multiple Employer Plan
• Plan typically adopted by the Plan Sponsor (management org) and the Charter schools participate in that plan.
403(b) Plans
10/17/2016
6
Types of 403(b) plans• 403(b)(1) - Annuity Contracts
– investments through Insurance Annuities
• 403(b)(7) - Custodial Accounts– investments through mutual funds
• 403(b)(9) - Church Plans (RICAs)– investments limited in Plan agreement– not necessarily limited to annuities and mutual funds– Trustee(s) may be Church official(s)– Retirement distributions available for housing allowance– 6% penalty for excesses does not apply
• Previously referred to as ‘Wrap’ 403(b)(1)/(b)(7) Document
• combined annuity/mutual fund investments in a single document
• Today this is merely a 403(b) Plan (no longer needs reference to (b)(1) or (b)(7)
403(b) Plan Documents• Beginning in tax year 2009, IRS regulations required a “plan” to be
established by the employer. The definition is the same as applies under the Qualified Plan rules.
• See ERISA 403(b) vs. NonERISA 403(b) later.• See 401(k) vs. 403(b) later.
• RICAs must be maintained pursuant to a Plan as well. The plan document must state the intent to constitute a retirement income account.
• A RICA that is treated as a annuity contract is NOT a custodial account even if the investments are solely in mutual funds. This allows for the more liberal distribution rules under a RICA.
10/17/2016
7
4 types of Qualified Employers403(b) Programs may be offered by:
1. Tax exempt organizations under §501(c)(3) IRC
"organized and operated exclusively for religious, charitable, scientific, public safety testing, literary, educational purposes to encourage national or international amateur sport competition, or for the prevention of cruelty to children or animals.“
Examples – hospitals, nonprofits, Universities/Colleges
4 types of Qualified Employers2. Public Educational Institutions
Includes primary, secondary, preparatory, or high schools, colleges and universities, and federal state and other public supported schools.
Examples – public schools, charter schools treated as public schools, State Colleges/Universities
3. Self-Employed Ministers (must have a 403(b)(9))!
10/17/2016
8
4 types of Qualified Employers4.Church/Church Related Organizations - “With”
and “Without” a Steeple
With a Steeple – A church, place of worship
Without a Steeple:
• QCCO (Qualified Church Controlled Org)
• For example, a Church School
• Non QCCO (Non-Qualified Church Controlled Org) For example, a Nursing Home run by the Church. More than 25% of income comes from non church resources.
403(b) Plan Required Provisions• A plan must describe all material terms and conditions regarding:
1. Eligibility, 2. Contributions and benefits, 3. Applicable limitations, 4. Timing and form of benefit distributions, 5. Including distribution events, hardship withdrawals, loans, etc.6. Available investment arrangements7. Amendment procedure
• Plan provisions must satisfy1. Universal availability2. 401(m) test3. 401(a)(17) limit for contributions other than deferrals4. All applicable limits, e.g. 4155. Vesting, if applicable
10/17/2016
9
403(b) Plan Required Provisions• Incorporation of Investment Contracts
• Plan must incorporate the terms of the investment arrangements by reference.
• Plan must provide that its terms govern over any inconsistent terms of the investment contracts.
• A Plan must contain an Appendix that:• Identifies the parties responsible for various administrative
functions.
• Lists all investment vendors offered.
• Includes sufficient information to identify the approved investment arrangements.
403(b) Plan Optional Features• Plan may include optional features:
– Employer contributions– Roth contributions– Hardship withdrawals– Loans– Acceptance of rollovers– In service withdrawals– “Exchanges” to 403(b) products approved within
the plan (for contributions or just exchanges)– Plan to plan transfers (in or out)
10/17/2016
10
Compliance• Exchange Agreements
• Post-Employment Employer Contributions
• Universal Availability for Elective Deferrals
• Financial Hardship Distributions
• Frozen and Terminated Plans
• Timely Contribution Remittance/Deposit
• Catch-up Ordering Rule
• Information Sharing Agreements
Other Unique Features• Post-employment Employer contributions
• Universal Availability– Does not apply to steeple churches or QCCOs
• ERISA VS NonERISA
• Adding a Top Hat 457 Plan– 457(b)
– 457(f)
10/17/2016
11
Post-employment Employer Contributions
Non-elective employer contributions to retirees’
accounts after death are limited to lesser of:
– Monthly compensation to be determined based on 1/12 of final contract salary times number of months elapsed in the year of death
– Total contributions that would have been made on retiree’s behalf if s/he had survived to end of 5-year period
– 415 limit for relevant year (final 12 months of compensation before severance)
Non-ERISA 403(b) Coverage and Nondiscrimination
Nondiscrimination Rule For Elective Deferrals –
“Universal availability” All employees must have an “effective opportunity” to defer.
Permitted exclusions:• Those who normally work less than 20 hrs/wk• Those who are nonresident aliens• Student providing services (usually to a 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)• Who do not wish to contribute at least $200 per year to a 403(b) account.
§403(b)(12)(A)(ii)
• Violation of the universal availability rule results in plan failure • Correction under EPCRS
10/17/2016
12
Universal Availability
• Requires “meaningful” written 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
Universal Availability– Effectively requires schools to count actual hours of
service for all employees if they want to exclude employees with fewer than 20 hrs/week (or less than1000 hours per year)
– Most TPAs encourage employers not to exclude any employees, especially if they can’t/don’t count hours.
– Failing Universal Availability can cause plan disqualification!
– New Annual 415 notice for years after pre-approved plans approval
10/17/2016
13
402(g) LimitTaxpayer limit for 2016 $18,000
• 401(k)
• 403(b)
• SARSEP
• SIMPLE-IRA (limit = $12,500)
Limited on calendar year basis.
457(b) not subject to 402(g) limit
401(k) v. 403(b) The 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.
– 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.
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 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 the requirements
10/17/2016
14
403(b) Catch up Rules• One “Catch-up” limit for all 403(b), 401(k),
SARSEP ($6,000) & SIMPLE-IRAs ($3,000)
• Separate “Catch-up” for 457(b) governmental
• No Age 50 “Catch-up” permitted for tax exempt 457(b)
• Both Age 50 “Catch-up” and 15-year rule available in the same year for 403(b)s. Catch-ups first treated as the 15-year catch-up and then age 50 catch-ups
403(b) allowable distributions –But Check the plan!
Provision Elective Def ER-Annuity ER- Custodial
Attainment of 59 1/2
Severance from employment
Death
Disability under 72(m)(7) Unless contract has diff definition
Disability other than 72(m)(7)
Plan Termination If groupcustodial agreements
If group custodial agreements
Financial Hardship
Attainment of stated age
Stated event or # of yrs.
10/17/2016
15
403(b) Allowable Distributions
29
Hardship (must follow 401(k) rules)- Hardship distributions may only include
principal amount of elective deferrals, not including earnings thereon.
IMPORTANT TO RECEIVE THIS INFORMATION WITH TRANSFERS/EXCHANGES/TAKEOVERS!
- Exception for pre-1989 monies, excluding earnings.
- Employer must have written hardship policy or custodial agreement/annuity has language
ERISA 403(b) or Non-ERISA 403(b)
or Keeping the Non-ERISA status of Nonprofit Plan
10/17/2016
16
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
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
10/17/2016
17
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
• Must have reasonable choice of investments, unless choice is offered through open architecture, one vender is generally not acceptable.
What Does Being Subject to ERISA Mean?
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
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, NotHaving Provided Disclosures
10/17/2016
18
How does a 501(c)(3) Maintain NonERISAStatus?
In order for 501(c)(3) Organizations to be considered Non-ERISA, the Department of Labor has provided safe harbor criteria listing what employers may and may not engage in as part of the day-to-day administration of the Plan.
Non-ERISA 403(b) Guidance • ERISA Regulation 2510.3-2(f)
– Limited Employer Involvement
• FAB 2007-02 – Employer may adopt a written document and other
clarifications of what employer may and may not do
• FAB 2010-01– Employer must have more than one vendor
– Exceptions to more than one vendor
– Additional issues of what employer may and may not do
• Advisory Opinion 2012-02A– Non-ERISA status lost if 403(b) deferrals receive a 401(k) match
10/17/2016
19
ERISA Regulation 2510.3-2(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 employeesB. Requesting information about the productsC. Summarizing or compiling information provided for employeesD. Collecting or remitting employee contributions E. Maintaining records, e.g. holding group contracts in employer’s nameF. Selecting annuity contractors, limiting to a reasonable number selected
to offer “reasonable” choice
ERISA Exemption Safe Harbor Clarifications under FAB 2007-2
• What employer actions are permitted under FAB 2007-2 and the 403(b) still be in the 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. 2013-12, 2015-27 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
10/17/2016
20
FAB 2007-02: 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
FAB 2010-1 ERISA Exemption from Safe Harbor
• Under FAB 2010-1, 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
10/17/2016
21
FAB 2010-1 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.”
FAB 2010-1 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.
10/17/2016
22
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
ERISA 403(b) vs. NonERISA 403(b)Provision ERISA Plan NonERISA Plan
Deposit of Elective Deferrals Required to be made into the Plan
as soon as the employer can
reasonably segregate the assets
from their general assets but no
later than the 15th day of the month
after the month the amounts were
deducted from pay.
7-day safe harbor rule applies to ERs
with less than 100 participants
As soon as administratively feasible. (No
15 day rule applies, however State law
will apply and may have a quicker deposit
rule – NJ is 3 days!)
Annuity Distributions for Spouse Requires that the Employee’s
spouse receive an annuity
distribution or opt out.
QJSA and QPSA rules apply
Not required.
10/17/2016
23
ERISA 403(b) vs. NonERISA 403(b)Provision ERISA Plan NonERISA Plan
Employer Responsibilities in Administration Employer is responsible as “Plan
Administrator” of the Plan to make
any administrative decisions with
respect to the Plan’s operations.
Employer may not make any
administrative decisions regarding the day
to day operations of the Plan. If the
Employer does the Plan will automatically
be subject to ERISA.
Many Practitioners have stated that they
believe that it will be impossible for an
Employer not to fall into the trap of
answering a question that will make them
subject to ERISA.
Protection from all Creditors ERISA protects all assets from all
creditors (except the IRS).
No federal protection from creditors.
State law would apply.
Department of Labor (DOL) Disclosures Mandates –
SPDs, SMMs, SAR
Benefit statements;
Fee Disclosures;
DOL does not have jurisdiction over
NonERISA 403(b) Plans, so that no DOL
disclosures are required.
Comparison/Contrast ERISA 403(b) to 401(k)
10/17/2016
24
ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan
Which Types of Businesses may
Establish Educational organizations and nonprofit
organizations under 501(c)(3)IRC, and
certain church organizations.
Sole Proprietor, Partnership, S-Corporation, C-Corporation; and all nonprofit organizations (including 501(c)(3)). Govts also grandfathered – 1986
Appropriate For Individuals and
Businesses That Have Earnings
Which...
Generally ERISA protects all assets from
all creditors (except the IRS).
Generally ERISA protects all assets
from all creditors (except the IRS).
Continued Existence of Plan Permanency must be intended Permanency must be intended
Annual Contribution Not Required Not Required
Maximum Annual Deduction Up to 100% of each participant’s
compensation not to exceed $53,000.
Employers do not receive “deduction”
Up to 25% of total covered
compensation
ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan
What is Compensation? If you are an employee, compensation is
generally your salary reported to you on your
Form W-2. If you are a self-employed minister
your compensation is your "earned income"
If you are an employee, compensation is generally your salary reported to you on your Form W-2. If you are a self-employed minister your compensation is your "earned income"
Eligibility/Participation All employees except nonresident aliens;
employees who work less than 20 hours per
week; professors on sabbaticals; certain
students;.
All employees who are age 21 and
have completed 1 year of service
must be able to elect to defer (For
employer contributions, 2 years, if
100% immediate vesting.)
Nonresident aliens and union
employees covered under collective
bargaining agreements
Vesting (Employer) Under most plans the following choices are available for employer contributions:Full and immediate vesting.100% vesting after 1, 2, or 3 years of service.6 year graded vesting schedule
Same
Vesting (Employee
Deferrals)
100% immediate 100% immediate
10/17/2016
25
ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan
Emergency withdrawals Permitted for hardships only, if provision is
adopted
Same
Taxation of Distributions Generally as ordinary income Potential favorable tax treatment
for 10 year averaging, capital gains,
NUA
Contribution Deadline Due date for employer’s federal income tax
return, including extensions
Note: Tax exempts file Form 990, which is due
the 15th day of the 5th month after tax year
end (also referred to as “report year”). For
§415 purposes contributions must be made by
the 15th day of the 6th month after tax year
end.
Due date for employer’s federal
income tax return, including
extensions
ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan
Safe Harbor Nonelective Not permitted Yes – 3% of compensation
Safe Harbor Match Yes - $1 for $1 Match up to 3% of comp plus
2% on the next 2% of comp. No ACP testing
Same
Form 5500 Required Required
Funding Deferrals by Employees max - $18,000 (2016) or $21,500 for long term employees.
Age 50 Catch-up -$6,000
Employer Matching permitted
Employer Discretionary Contribution permitted.
Deferrals by Employees max -$18,000 (2016)
Age 50 Catch-up -$6,000
Employer Matching permitted
Employer Discretionary Contribution permitted.
10/17/2016
26
ERISA 403(b) vs. ERISA 401(k)FEATURES OF… ERISA 403(b) Plan ERISA 401(k) Plan
Top Heavy Rules Do not apply Applies
Permitted Disparity Available Same
Nondiscrimination Tests Deferrals – Universal AvailabilityMatching – ACPNonelective – 401(a)(4)
Deferrals – ADP
Matching – ACPNonelective – 401(a)(4)
Annuity Provisions Applies Applies
RMDs Generally 4/1 of year following later of 70 1/2
or retirement. Special rule for pre-1987
account
Generally 4/1 of year following later
of 70 1/2 or retirement for non 5%
owners. For 5% owners, generally
4/1 of year following attainment of
age 70 ½.
Why would an Employer adopt a 401(k) in lieu of a 403(b) Plan?
• Lack of understanding
• Eligibility of 1 or 2 years would reduce eligible employees and may not subject the Plan to an audit
• Employer should compare Universal Availability rule to the ADP test to see which one may work better.
10/17/2016
27
Comparison/Contrast Tax exempt 457(b) to 457(f)
457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Gov./Tax-exempt 457(f)
Participation Select/Top Hat Group Select/Top Hat Group
Contribution Limit $18,000 for 2015 No Limit
Types of Permitted
Deferrals
Pre-Tax only, No Roth deferrals N/A
Age 50 Catch-up Not applicable Not applicable
Special 3-year catch-up Up to 2 X the normal deferral limit Not applicable
Responsibility for
Withholding
Tax-exempt Entity Employer
Rollovers to other Plans No No
Transfers Yes. To another tax-exempt 457(b) No
Transfer to State Plan to
purchase service credits
No No
10/17/2016
28
457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Tax-exempt 457(f)
Distributable Events Based on document and employee elections Generally lump sum or over 5 years; based on document
Loans Permitted No No
RMD Rules Yes. Later of 4/1 after 70 ½ or retirement Not applicable
Vesting Permitted for Employer Contributions Not applicable
FICA Tax Yes. Applies later of: when services are
performed or when no longer substantial risk
of forfeiture
Yes. Applies later of: when services
are performed or when no longer
substantial risk of forfeiture
FUTA Tax Yes, except 501(c)(3) Organizations Yes, except 501(c)(3) Orgs
Reporting Contributions N/A N/A
Reporting Distributions Form W-2, except decedents Form W-2, except decedents
Form 5500 One-Time “Top-Hat” Declaration” 120 days
after establishment
One-Time “Top-Hat” Declaration”
120 days after establishment
457(b) vs. 457(f)FEATURES OF… Tax-Exempt 457(b) Tax-exempt 457(f)
Curing Excess Deferrals Similar to 401(k) N/A
Curing other Excesses Waiting for EPCRS update Waiting for EPCRS update
Investments Depends on document; “hypothetical” investment direction
Depends on document; “hypothetical” investment direction
Deemed IRAs Not permitted Not permitted
Savers tax credit available No No
10% premature tax No No
QDRO rules Applies No
Subject to 15 day Plan
asset rule
No No
Trust required Not permitted unless a Rabbi or secular trust
is established
Not permitted unless a Rabbi or
secular trust is established
10/17/2016
29
Controlled GroupsOther IssuesPlan Design
Special Control Group Rules for 501(c)(3) Orgs
• New rules applied beginning for years after 12/31/08 with respect to “controlled groups of businesses”
• If there is commonality in directors, trustees, or individuals on boards of directors in multiple organizations, such organizations may need to be treated as one employer.
10/17/2016
30
Special Testing Rules for 403(b) plans
For controlled groups, where 2 plans are maintained:
• 410(b) Coverage and 401(a)(4) tests are combined
• ADP is separate for any 401(k)
• Universal Availability is separate for any 403(b)
• ACP is separate
Late contributions to 403(b) Plans
• 403(b) plans are not subject to the excise tax under 4975
• They ‘may be’ subject to a 5% excise tax under ERISA section 502(i)
• Form 5330 cannot be used to pay the 5% tax
• Most employers will deposit the late contributions along with the earnings and then file under the DOL’s VFCP to pay the 5% excise tax
10/17/2016
31
PTO Contributions
Revenue Rulings 2009-31 and 2009-32 permitted deposits of unused sick and vacation leave to only 401(k) Plans.
Many 403(b) plans are written to offer this option
IRS indicated that this may be added for 403(b) and 457 plans, but as of this date has not had official guidance! Although IRS permitting in pre-approved plans.
Now lets look at Plan Design
Non-Profit Employers (501(c)(3))
403(b)
457(b)
457(f)
401(a) Profit-Sharing, Money Purchase
401(k)
SEP/SIMPLE-IRA (but not with Model 5305-SEP)
10/17/2016
32
Church Plan DesignChurches 403(b) 401(a) 401(k) Careful – not always advantageous! SEP (not with Model 5305-SEP) SIMPLE-IRA
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
Miscellaneous Adjunct Professors –
• Challenging endeavor for years
• Affects all retirement plans not just 403(b) plans
• Can affect eligibility and vesting
• A “part-time” professor hired on a contractual basis
• Cannot exclude by class
• Violation of Universal Availability Rule
• Affordable Care Act and ACA regulations and preamble– Counting hours can be any ‘reasonable’ method
– May not be added to Plan Document
– Accepted by IRS auditors
10/17/2016
33
Miscellaneous
One reasonable method that is acceptable under IRS audit is – an employer would credit hours as follows:
• 2.25 hours per week for each hour of teaching or classroom time
PLUS
• 1 hour of service per week for each additional hour of service outside the classroom performing required duties (e.g., office hours, department meetings).
Special Employee/Employer Contributions
FICA Replacement Plans 7.5 % required between Employer and Employee
Depends on Government Employer’s State, type of Employee, etc.
I.e., “Part time” individuals in PA can participate in a FICA replacement Plan
PTO Contributions
Mandatory Employee Contribution vs. Auto Enrollment
Mandatory Employee Contribution – Treated as a Non Elective Employer Contribution
Is Subject to FICA tax
10/17/2016
34
Special Employee/Employer Contributions
FICA Replacement Plans 7.5 % required between Employer and Employee
Depends on Government Employer’s State, type of Employee, etc.
I.e., “Part time” individuals in PA can participate in a FICA replacement Plan
PTO Contributions
Mandatory Employee Contribution vs. Auto Enrollment
Mandatory Employee Contribution – Treated as a Non Elective Employer Contribution
Is Subject to FICA tax
Structure of Multiple Plans (2016)
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 $15,000ESTIMATED TOTAL FOR YEAR 2016 $48,000
* These amounts reduce the annual compensation
10/17/2016
35
Structure of Multiple Plans (2016)Jane, age 60 is the CEO of a non-profit and earns $100,000. She is retiring next year (2017) and will be receiving a post-employment amount of $10,000 in 2017. Her contract also has required the Employer to contribute to a 457(f) for Jane in the amount of $20,000 per year since 2012.
403(b) Defers the maximum $24,000
403(b) Employer Contribution $10,000 (added in 2017)
457(b) Defers the maximum $24,000
457(f) Employer Contributes $20,000
ESTIMATED TOTAL FOR YEAR $78,000
Structure of Multiple Plans (2016)
Why are we layering these types of plans?
Remember that one plan – 403(b) or 401(a) cannot accept more than $53,000 (for 2016).
By establishing multiple plans the employees can maximize their contributions and not run afoul of the limitations.
By law, 401(a) plans and 403(b) plans are not aggregated when looking at the $53,000 cap.
10/17/2016
36
Questions
Copyright 2016 PenServ Plan Services, Inc. 71