Special Issues for Non-Profits - Employee Benefits Ginny Schubert Employee Benefits & Executive Compensation Practice Group Gray, Plant, Mooty virginia.schubert@gpmlaw.com Application of ERISA Does ERISA apply to tax-exempt organizations? Unless the tax-exempt organization is a church or governmental entity, it is subject to ERISA. Governmental entity An organization under the control of an elected official or body Church An organization controlled by or associated (shares common religious bonds and convictions) with a church or convention of churches 2 1
Application of Internal Revenue Code How do the employee benefit rules of the Internal Revenue Code apply to tax-exempt organizations? Generally, the same as for taxable employers, except for Code Sections 403(b) and 457 403(b) 403(b) plans, sometimes called tax-sheltered annuities, can be established by:» 501(c) organizations; and» Governmental educational organizations 457 Applies to nonqualified deferred compensation plans of:» All tax-exempt organizations (not just 501(c)(3)); and» Governmental entities 3 403(b) Plans What is a 403(b) plan? A 403(b) plan is much like a 401(k) plan, but there are some important differences Sponsorship is limited Different rules for testing salary-reduction contributions Allows for special catch-up salary-reduction contributions Investments are limited to mutual funds and annuities Non-elective employer contributions can be made up until 5 years after termination of employment (but subject to nondiscrimination rules) Note: Salary reduction limit ($16,500 ($21,000 with age 50 catch-up)) is cumulative, so that most employers do not have both a 403(b) and a 401(k) plan. 4 2
457 Arrangements What is a 457 plan? Code Section 457 applies to nonqualified deferred compensation plans of taxexempts and governmental organizations. Not a permissive provision, but a mandatory restriction on how these plans can be constructed and administered. Came about because of Congress concern about lack of adversity between employers and employees regarding tax inclusion/tax deduction 5 Deferred Compensation Subject to 457 What is a deferred compensation plan subject to 457? Excludes Qualified retirement plans 403(b) plans Bona fide vacation, sick leave, disability, death or severance benefit arrangement IRS focuses particularly on the severance benefit exclusion» Must be paid due to an involuntary termination» A dollar limit may be imposed (Notice 2007-62) Non-elective plans for Board members and other nonemployees Any arrangement, other than described above, that provides a promise to pay compensation in the future is subject to 457. 6 3
Restrictions Imposed by 457 What are 457 s limits and restrictions? Essentially allows for two types of plans Tax-favored 457(b) or eligible plan Written document Annual contribution limit ($16,500 same as 401(k)/403(b) salary reduction limit)» Limit applies to both salary reduction and employer contributions» No age 50 catch-up unless the employer is a governmental organization No in-service distributions except for financial emergencies Other distribution rules similar to qualified and 403(b) plans Not subject to Code Section 409A Restrictive 457(f) or ineligible plan Tax deferral is dependent on whether the benefit is subject to a substantial risk of forfeiture Subject to Code Section 409A 7 Importance of Section 457 Why is Code Section 457 important? 457(b) plans Allows an additional tax-favored benefit to executives of taxexempt organizations, essentially allowing them to receive an additional tax-deferred retirement plan contribution of $16,500 per year, but The benefit is not available unless there is a written document and all the rules of 457(b) are followed. 457(f) Frequently used by tax-exempts to provide a higher benefit to executives Subject to IRS scrutiny/audits because of perceived abuse Notice 2007-62 - stricter regulations are likely to be issued soon Compliance with both 457(f) and 409A rules require a rigorous analysis Broader application than employers might think E.g., long-term bonus plans 8 4
ERISA Considerations Note that both 457(b) and 457(f) arrangements are subject to ERISA (unless the employer is a governmental entity or church) Employees Extensive ERISA rules for pension plans apply, unless» Top hat exemption applies (participation limited to a select group of management or highly-compensated employees ), or» Plan is not an ERISA pension plan, e.g., a bonus plan» DOL top-hat plan filing required for ERISA pension plans Directors and other independent contractors ERISA rules do not apply so that participation can be broad-based and no DOL filing required (assuming no employees participate) 9 5