403(b) vs. 401(k) Plan Design Considerations for Tax-Exempt Organizations Tuesday, April 30, 2013

Transcription

1 403(b) vs. 401(k) Plan Design Considerations for Tax-Exempt Organizations Tuesday, April 30, 2013 Rod Stortenbecker, CPC, QPA, FLMI Senior Consultant, Lincoln Financial Group

2 Plan design options for tax-exempt organizations Numerous types of tax-exempt organizations Only certain tax-exempt and governmental entities may sponsor 403(b) plans: 501(c)(3) no other tax-exempt organizations Public schools and certain governmental entities Today s discussion will focus on a 501(c)(3) tax-exempt organization s sponsorship of a 403(b) plan

3 Plan design options for tax-exempt organizations What types of plans can a 501(c)(3) tax-exempt organization sponsor? 401(k) 401(a) (Profit Sharing or Money Purchase) 403(b) 457(b)

4 403(b) plans - ERISA vs. Non-ERISA Subject to ERISA means participants benefits & rights are protected These include eligibility, participation, funding, reporting, disclosure, anti-alienation, anti-assignment, bonding and fiduciary duty. A 403(b) plan can be exempt from ERISA requirements if certain conditions are met. Regulatory exemption employer cannot exercise discretionary authority and decision making additional factors must be considered Statutory exemption applies to governmental plans and non-electing church plans Today s discussion will focus on ERISA 403(b) plans

5 Impact of recent changes on 403(b) plans 2009 Final Regulations Written plan document requirement Elimination of open-ended contract-to-contract transfers o Replaced with contract exchanges and has restrictions/conditions Clarification on nondiscrimination rules for salary deferrals o Normally scheduled to work fewer than 20 hours per week Termination of a 403(b) plan possible EPCRS (Revenue Procedures and ) Expanded correction program now available to address errors in plan administration as well as plan document

6 403(b) vs. 401(k) - Basic differences Comparison of 403(b) and 401(k) plans Availability and general requirements Eligibility and entry requirements Plan design considerations Contribution limits Testing requirements Reporting requirements Disclosure requirements

7 Availability 403(b) vs. 401(k) - Basic differences (cont.) Who can sponsor? Section 501(c)(3) taxexempt organization, educational institution, and electing church employer Any business entity, including tax-exempt organizations, corporations, partnerships, and sole proprietors Note: A governmental entity is ineligible from sponsoring a 401(k) unless the plan is grandfathered.

8 403(b) vs. 401(k) - Basic differences (cont.) General Requirements Funding vehicle and investment options Written plan document Annuity contract that satisfies Section 403(b)(1)) or mutual funds held in a Section 403(b)(7) custodial account Required Group annuity contract or trust which may hold investments such as mutual funds, nonregistered separate accounts, stocks, bonds, and employer securities. Required

9 403(b) vs. 401(k) - Basic differences (cont.) Eligibility Requirements Eligible Employee Salary deferrals: universally available ; exclusions include: o Employees normally scheduled <20 hours/week o Student employees o Nonresident aliens without U.S. source income o Employees covered under another 401(k), 403(b), or govt. 457(b) plan o Those with deferrals < $200 Employer contributions: o Exclusions allowed provided Section 410(b) minimum coverage passed All contributions available to all employees; exclusions include: Statutory exclusions: o Nonresident aliens without US source income o Collectively bargained employees Non-statutory exclusions: o Exclusions allowed provided Section 410(b) minimum coverage test passed

10 Entry Requirements 403(b) vs. 401(k) - Basic differences (cont.) Entry Requirements Salary deferrals: No age or service requirement allowed Employer contributions: Age and/or Service requirement allowed Maximum age 21 1 year of service; 2 years if full and immediate vesting All contributions: Age and/or Service requirement allowed: Maximum age 21 Deferrals: 1 year of service Employer Contributions: 1 year of service; 2 years if full and immediate vesting

11 403(b) vs. 401(k) - Basic differences (cont.) Plan Design Considerations Safe Harbor Design Vesting Plan to Plan Transfers Allowed deemed to pass ACP test Salary deferrals: Full and immediate Employer contributions: maximum 3-year cliff or 6-year graded schedule transfers replaced with contract exchanges and plan to plan transfers Allowed deemed to pass ADP and/or ACP test Salary deferrals: Full and immediate Employer contributions: maximum 3-year cliff or 6-year graded schedule Transfers are allowed between 401(k) plans in certain circumstances

12 Contribution Limits 403(b) vs. 401(k) - Basic differences (cont.) Contribution Limits and Aggregation 415 limit lesser of 415 Compensation or 415 limit as indexed; 2013 limit is $51,000 Includes employee and employer contributions Excludes: Age 50 catch-up contributions. Note: The 15- year special catch-up is included in 415 limit. 415 limit lesser of 415 Compensation or 415 limit as indexed; 2013 limit is $51,000 Includes employee and employer contributions Excludes: Age 50 catch-up contributions Please note: Generally, the 415 limit applies individually to each plan ( control exception). In 2013, an employee could receive $51,000 in each type of plan. The 402(g) limit requires aggregation of the deferrals made to all 403(b) and 401(k) plans for the calendar year. For 2013, an individual s limit to defer in both plans is $17,500, exclusive of catch-up contributions. The 457(b) top hat plan has its own limit and such contributions are excluded in these plans limits.

13 403(b) vs. 401(k) - Basic differences (cont.) Contribution Limits (cont.) Roth Contributions Catch-up Contributions Allowed Age 50+ catch-up allowed 15-year catch-up allowed for certain employers and specific service and contribution requirements. Employees who qualify may contribute up to $3,000 above the applicable 402(g) limit. Allowed Age 50+ catch-up allowed

14 403(b) vs. 401(k) - Basic differences (cont.) Testing Requirements Nondiscrimination Testing Salary Deferrals Universal Availability Requirement No formal test Employer Match ACP Test 410(b) Minimum Coverage Test Employer Non-elective 401(a)(4) General Test 410(b) Minimum Coverage Test Note: Benefit, Right or Feature Test may apply Salary Deferrals ADP Test 410(b) Minimum Coverage Employer Match ACP Test 410(b) Minimum Coverage Test Employer Non-elective 401(a)(4) General Test 410(b) Minimum Coverage Test Note: Benefit, Right or Feature Test may apply

15 403(b) vs. 401(k) - Basic differences (cont.) Testing Requirements (cont.) Top Heavy Not applicable Applicable unless plan meets exception available for 401(k) safe harbor plan design

16 403(b) vs. 401(k) - Basic differences (cont.) Reporting Requirements Form 5500 Required Required Audit Requirement Required if plan has greater than 100 lives Required if plan has greater than 100 lives

17 403(b) vs. 401(k) - Basic differences (cont.) Disclosure Requirements Participant Disclosure and Notice Requirements SPD SMM SAR Benefit statements Fee disclosure Special tax notice Universal availability notice The following may apply: Safe harbor notice Automatic enrollment QDIA Blackout/SOX notice Same, except Universal Availability does not apply). In addition, employer stock diversification may apply.

18 401(k) and 403(b) plans Key differences Some of the most significant differences between 403(b) and 401(k) plans are: Plan eligibility Universal Availability / ADP testing Top-heavy

19 Adopt a 401(k) rather than a 403(b)? Why would an eligible organization adopt a 401(k) plan rather than a 403(b) plan? May not understand or may assume 401(k) is better Eligibility or possible exclusion of certain employee classes/groups for salary deferral purposes Universal Availability requirement vs. ADP o May be able to project results & determine which is better Different investment options or ability to utilize certain types of investments

20 Maintain multiple plans Is it advantageous to maintain a 403(b) and a 401(k) or 401(a) plan? May allow an employer to double up contributions for some groups Additional Considerations A number of nonprofit employers still have more than one plan 403(b) plan typically will accept salary deferrals and 401(a) plan will accept employer non-elective contributions 401(a) plan may even accept the employer match associated with the deferrals to the 403(b) plan A 403(b) plan may be terminated but cannot be merged with a 401(k) or 401(a) plan May acquire an entity that has plan (merge, terminate, freeze?) Paternalistic retirement leakage concerns for terminated plans

21 Questions? Thank you. 403(b) vs. 401(k) - Plan Design Considerations for Tax-Exempt Organizations Rod Stortenbecker, CPC, APA, FLMI Senior Consultant Lincoln Financial Group Rod.Stortenbecker@LFG.com