However, it has now discovered that, due to the actual deferral percentage testing rules, the CEO’s ability to make elective deferral contributions is now significantly limited.
The plan’s adviser asks: “When can this employer start a 403(b) plan again?”
David Levine, Groom Law Group, Chartered, says:
That is one of the reasons many tax exempt employers prefer 403(b) plans to 401(k) plans. Adopting a nondiscrimination safe harbor is one possible solution, though it may be expensive. Adding a 457(b) plan if there is not one already is another possibility.
In any event, under the final 403(b) regulations, the general rule is that a new 403(b) plan may only be set up as a successor to a plan that was subject to distribution restrictions (a plan that allowed salary deferrals or was funded with 403(b)(7) custodial accounts) once 12 months have passed since all assets were distributed out of the terminated 403(b) plan.
However, if eligibility for the new 403(b) plan (and all other 403(b) plans of the sponsor) for the 12 month period beginning before the 403(b) plan was terminated and for the 12 month period after the date on which all terminated plan assets were distributed is limited to less than 2% of the employees who were eligible under the terminated 403(b) plan, the new 403(b) plan may be set up sooner. Of course, the new 403(b) plan must still satisfy the universal availability rules.
Going forward, the employer could return to a 403(b) plan for all employees and freeze or terminate its 401(k) plan or it could elect to maintain both the 401(k) and 403(b) plans. Of course, each approach has different administrative costs.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.