Who can sponsor a 403(b) plan?
While most types of companies can sponsor qualified plans like 401(k) plans, only the following types of organizations can sponsor 403(b) plans:
- Not-for-profit organizations that are tax exempt under Internal Revenue Code section 501(c)(3);
- Public educational organizations;
- A duly ordained, commissioned, or licensed minister of a church who is self-employed; and
- An organization that isn’t exempt under 501(c)(3) but shares a common religious bond with minister whom it employs.
Other types of entities are not permitted to sponsor 403(b) plans.
Why would an organization choose a 403(b) plan instead of a 401(k) plan?
There isn’t any one answer to this question. Rather, it depends on the specific circumstances of each organization. Some of the factors to consider are the goals of the organization, the types of contributions to be provided and the type and number of employees to be covered.
An article that reviews this question in more detail is available here.
Am I required to offer the 403(b) plan to all employees of the organization?
There is a special rule called the universal availability requirement that applies to 403(b) plans. In a nutshell, it says every employee must be immediately eligible to make salary deferrals to the plan. If the sponsor will make match or nonelective contribution, the plan can impose eligibility requirements similar to those available in a 401(k) plan as long as all employees are permitted to make salary deferrals.
Does that mean I cannot exclude any types of employees from making deferrals?
There are several limited exceptions. The following types of employees can be excluded from making salary deferrals:
- Non-resident aliens;
- Employees who are scheduled to work fewer than 20 hours per week (must be included if actual work hours for a given year are at least 1,000); or
- Employees who are eligible to participate in another salary deferral plan (including a 457 plan) sponsored by the same employer.
There are several important things to note about these exclusions. First is that the exclusion must be written into the plan document in order for it to apply. Second is that if an employer elects to use one of these exclusions, then all employees in that category must be excluded. In other words, it would violate the universal availability requirement to exclude some students while including others.
What happens if I have excluded employees that should have been allowed to participate?
Usually, the correction is for the organization to make corrective contributions for the employees who were improperly excluded. The IRS correction program provides detailed guidance on how to calculate these contributions, and DWC is available to assist you with the correction process.
You mentioned a plan document. Does that mean 403(b) plans required to have written plan documents like 401(k) plans?
Yes. As discussed further below, many of the rules that apply to 401(k) plans apply on a limited basis or not at all to 403(b) plans. However, the IRS issued new regulations, effective in 2009, that made it clear that all 403(b) plans are required to maintain written plan documents regardless of whether or not other compliance rules apply.
What are some of those compliance rules that apply on a limited basis?
The Employee Retirement Income Security Act of 1974, known as ERISA, is one of the main laws that govern employee benefit plans. While most retirement plans are covered by that law, certain 403(b) plans are exempt if they meet any one of the following requirements:
- Government entities, e.g. public schools;
- Churches or church-controlled organizations, unless they make a special written election to be covered; and
- Organizations that have only limited involvement in facilitating the operation of the plan.
Plans that meet one of those requirements are exempt from ERISA and are, therefore, also exempt from nondiscrimination testing, Form 5500 filing and other general fiduciary obligations.
Any plan that does not meet one of these criteria is covered by ERISA.
What does limited involvement mean?
This is a somewhat subjective standard; however, here are some examples of certain actions that clearly cross the line.
- Making matching or non-elective contributions;
- Approving loan or distribution requests; and
- Limiting the vendors or investment options from which employees can select.
Once a plan is covered by ERISA, maybe because it made an employer match in a previous year, can it ever become un-ERISAfied?
No. Once a plan is covered by ERISA, it is always covered.
Do 403(b) plans have to go through all the compliance testing each year like 401(k) plans?
As noted above, plans that are not covered by ERISA are also exempt from the nondiscrimination requirements. ERISA-covered plans are required to satisfy most of the nondiscrimination rules that apply to other plans.
One key exception is the ADP test that normally applies to salary deferrals. As a trade-off to the universal availability requirement (described above), 403(b) plans are not required to pass the ADP test. This allows any highly compensated employees to maximize their deferrals.
Plans that include employer contributions must pass the minimum coverage test and, in the case of matching contributions, the ACP test.
The top-heavy determination does not apply to 403(b) plans.
Do sponsors of 403(b) plans have to file Form 5500 each year?
ERISA-covered 403(b) plans are required to file Form 5500 each year. Plans that cover more than 100 participants as of the first day of the year must also attach an audit by an Independent Qualified Public Account to their Form 5500 at the time of filing.
Do I have to be concerned with orphaned accounts of employees that left a long time ago?
Regardless of a participant’s current employment status, older plan accounts can be disregarded for both the participant count and financial statement reporting on Form 5500 is they meet all of the following requirements, which are taken directly from DOL Field Assistance Bulletin 2009-02:
- The contract or account was issued to a current or former employee before January 1, 2009;
- The employer ceased to have any obligation to make current contributions (including salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009;
- All of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
- The individual owner of the contract is fully vested in the contract or account.
What should I do if I incorrectly thought my 403(b) plan was exempt from ERISA and have never done any testing or filed a Form 5500?
First, take a deep breath. You are in good company. We have worked with many organizations in that very situation.
The IRS and Department of Labor correction programs allow for the voluntary correction of these types of oversights, but both agencies tend to be a little less understanding if they discover the errors first. A list of IRS enforcement initiatives involving 403(b) plans is available here.
Simply call or e-mail us, and we can talk you through the process of getting the testing and government filings up to date.
Are there any restrictions on the types of investments that can be offered in a 403(b) plan?
Yes. Generally speaking, 403(b) plans can only invest in a custodial account that holds SEC-registered mutual funds and/or an annuity contract. Certain church plans are also able to invest in retirement income accounts.
403(b) plans are generally prohibited from investing in individual stocks or bonds, collective investment funds and self-directed brokerage accounts.
The content of this website is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances.